Budget Issues: Privatization/Divestiture Practices in Other Nations
(Letter Report, 12/15/95, GAO/AIMD-96-23).

A variety of divestiture proposals are now being considered in the
United States, including selling the Naval Petroleum Reserves, four
Power Marketing Administrations, and the Helium Program. Because the
U.S. government has limited experience with asset divestiture, GAO
examined the experiences of other governments for lessons that might
prove useful for the United States. For this study, GAO reviewed the
divestiture experiences of the following five countries: Canada, France,
Mexico, New Zealand, and the United Kingdom and major industries that
have been fully or partially privatized such as agriculture, mining and
construction, manufacturing, transportation and public utilities,
finance, insurance, and real estate, and services. This report discusses
(1) the privatization process, (2) the valuation and preparation of the
assets for sale, and (3) the use and display of the sale proceeds for
budgetary purposes.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  AIMD-96-23
     TITLE:  Budget Issues: Privatization/Divestiture Practices in Other 
             Nations
      DATE:  12/15/95
   SUBJECT:  Privatization
             Federal corporations
             Deficit reduction
             Foreign governments
             Economic analysis
             Non-government enterprises
             Profits
             Sales
             Fair market value
             Competition
IDENTIFIER:  Dept. of the Interior Helium Conservation Program
             United Kingdom
             Canada
             France
             Mexico
             New Zealand
             Naval Petroleum Reserve
             
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Cover
================================================================ COVER


Report to the Honorable
Scott Klug, House of Representatives

December 1995

BUDGET ISSUES -
PRIVATIZATION/DIVESTITURE
PRACTICES IN OTHER NATIONS

GAO/AIMD-96-23

Privatization and Divestiture Practices

(935165)


Abbreviations
=============================================================== ABBREV


Letter
=============================================================== LETTER


B-262042

December 15, 1995

The Honorable Scott Klug
House of Representatives

Dear Mr.  Klug: 

This report responds to your request that we review the divestiture
experiences of central governments of several other nations. 
Specifically, we examined issues relating to (1) the privatization
process, (2) the valuation and preparation of the assets for sale,
and (3) the use and display of the sale proceeds for budgetary
purposes. 

In the United States, the term "privatization" can refer to a broad
range of activities that, to varying degrees, lessen the government's
involvement in the provision of goods and services.  In common
discourse, the privatization spectrum can include contracting out,
public-private partnerships, vouchers, and franchising, as well as
the actual sale-- divestiture--of government assets and operations. 
Our review focused on the last activity, the transfer of ownership
from the government to the private sector.  Specifically, we studied
the divestiture of entire operations, a process which involves the
sale of an ongoing concern along with the physical assets associated
with the operation.  We did not address concessioning, which is a
process by which the government sells the right to operate property. 

A variety of divestiture proposals are currently under consideration
in the United States--including selling the Naval Petroleum Reserves,
the United States Enrichment Corporation, four Power Marketing
Administrations, and the Helium Program.\1 These proposals raise a
number of economic, policy, and budgetary issues related to the
management of the process, structuring the entity for sale, the role
of continued regulation, and the use of sale proceeds. 

Since the U.S.  government has limited prior experience with the
divestiture of assets\2 you asked us to look at governments with more
experience with divestiture to see if lessons from their experiences
may prove useful to the United States.  For this study, we reviewed
the divestiture experiences of five countries--Canada,\3

France, Mexico, New Zealand, and the United Kingdom.  Many of the
industries in the countries reviewed have always been part of the
private sector in the United States.  Nevertheless, we found certain
common elements in the privatization process in each country
reviewed.  Table 1 summarizes the types of entities, by industry,
that each of these countries has sold. 



                                               Table 1
                               
                               Types of Entities Privatized by Country
                                             and Industry


                                                                                          Cumulative
                                                                                          sale
                                                                         Finance          proceeds
                                                                         ,                as
                                                                         insuran          percentage
                  Agricultur  Mining and               Transportation    ce, and          of gross
                  al          constructi  Manufacturi  and public        real     Servic  domestic
Country           services    on          ng           utilities         estate   es      product\a
----------------  ----------  ----------  -----------  ----------------  -------  ------  ----------
Canada            Fishing     Mining      Aircraft     Airline                    Hotel   0.6 (1984-
                              Oil                      Trucking                           1990)
                                                       Telecommunicatio
                                                       ns

France                        Oil         Petrochemic                    Financi          1.5 (1983-
                                          al                             al               1991)
                                                                         service
                                                                         s
                                                                         Insuran
                                                                         ce

Mexico                        Mining      Automobile   Airline           Financi  Hotel   6.3 (1989-
                                          Steel        Trucking          al               1992)
                                          Iron         Toll roads        service
                                          Cement       Telecommunicatio  s
                                          Petrochemic  ns
                                          al
                                          Foodstuffs

New Zealand       Forestry    Oil         Steel        Airline           Financi  Hotel   14.1
                                          Printing     Shipping          al               (1987-
                                                       Rail              service          1991)
                                                       Telecommunicatio  s
                                                       ns                Insuran
                                                                         ce

United Kingdom                Oil         Automobile   Airline           Financi  Hotel   11.9
                                          Steel        Airport           al       Public  (1979-
                                          Ordnance     authorities       service  housin  1991)
                                          Aerospace    Trucking          s        g
                                          Foodstuffs   Shipping
                                                       Harbors
                                                       Bus companies
                                                       Telecommunicatio
                                                       ns
                                                       Water
                                                       Electricity
----------------------------------------------------------------------------------------------------
\a Cumulative sale proceeds are divided by the average annual GDP for
the years indicated for each country. 


--------------------
\1 Some of these proposals are discussed in other GAO reports.  See
the list of related GAO products at the end of the report. 

\2 The principal divestitures the U.S.  government has undertaken are
the sale of Conrail in 1987, and the sale of the Great Plains Coal
Gasification Plant in 1988.  The details of these sales can be found
in appendix I. 

\3 The references to Canada relate only to the federal government and
not to the activities of the provinces, which may have different
mechanisms in place for their divestitures. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

The Privatization Process:  In the governments examined for this
study, the goals for the privatization program were central to the
process and influenced how and what entities would be offered for
sale.  For example, privatization in the United Kingdom was based on
the belief that the private sector could generally operate commercial
enterprises more efficiently than the public sector.  Within the
overall goal of increasing efficiency, officials in the United
Kingdom said they valued entities for sale to maximize the proceeds
from that particular sale rather than to determine if the entity
should be sold.  In contrast, officials in New Zealand said they used
valuation to compare what an entity would be worth if it were sold to
its worth if it were retained by the government because both economic
efficiency and debt reduction were their primary goals.  Generally,
the government in New Zealand would only sell entities if the return
from the sale was greater than the value to the government if it
retained the entity. 

Valuation and Preparation for Sale:  The governments in this study
used a combination of valuation techniques.  A few used "clawbacks"
or other types of warrants to help protect taxpayers against
undervaluation.  Clawbacks are stipulations that under certain
conditions, will require the buyers to return a share of profits--or
losses--to the government.  They have been used by these governments
to protect against unanticipated windfall profits accruing to the
entity's purchasers after privatization.  The use of clawbacks,
however, decreases the sale price and may constrain the entity's
commercial behavior. 

All governments we contacted used private sector financial advisors
to assist Treasury or Ministry of Finance staff in the valuation
process.  In some countries, the entity to be sold hired its own
private sector financial advisors as well. 

As part of restructuring, most of the governments we studied
attempted to remove liabilities or obligations from entities to be
privatized.  Debt, in particular, was usually restructured, with the
government often retaining at least some of these liabilities.  Most
of the governments also paid for unfunded employee obligations in
advance of the sale.  Some of the governments retained other
liabilities, such as those relating to environmental clean-up, to
remove risks that would reduce the anticipated sale price of the
entity.  Restructuring also included breaking up monopolies prior to
their sale. 

The Use and Display of Sale Proceeds for Budgetary Purposes:  Most of
the governments in this study used any proceeds that resulted from
privatization primarily to reduce debt and interest costs and many
did not permit the cash received to be used to offset ongoing
spending.\4 The New Zealand and Mexican governments displayed annual
budget deficits and surpluses both with and without the proceeds from
privatization.  Despite this general policy to use proceeds for debt
reduction, various government officials told us that some governments
may have used sale proceeds to offset ongoing spending in particular
instances. 

The ways in which the governments we studied implemented
privatization programs and the lessons policymakers learned could
help the United States in evaluating and, ultimately, carrying out
divestitures currently under consideration.  The matters for
consideration section of this report discusses specific practices of
other governments that could be particularly relevant to issues the
United States faces today. 


--------------------
\4 A country cannot actually begin to reduce its nominal government
debt unless it is in fiscal balance or has a budget surplus. 
However, when a government sells assets, the sale proceeds will
reduce the country's borrowing requirements from what they would have
been, and as a result, the debt servicing costs will also be reduced. 


   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :2

To identify budgetary issues and concerns, we examined existing
divestiture proposals in the United States, reviewed earlier GAO
reports\5 and proposed legislation relating to asset divestiture in
the United States, and conducted a literature search of budgetary
issues related to privatization. 

We selected industrialized countries for our study that had a history
of selling government-owned assets and for which we could gain access
to appropriate staff and written information.  Based on these
criteria, we selected Canada, France, Mexico, New Zealand, and the
United Kingdom. 

To review the divestiture experiences of these countries, we
conducted telephone interviews with a wide range of government
officials directly involved with divestiture and with experts outside
of government who were responsible for specific aspects of
divestiture, such as valuation.  We also reviewed literature on
privatization in the five countries and official government
documents.  We did not verify the accuracy of all of the information
provided to us nor did we evaluate the sales' relative success in
achieving national goals. 

We concentrated our discussions on cross-cutting, rather than
industry-specific, issues we had identified that would be of interest
to the United States as it examines its own divestiture efforts. 

We conducted this work in Washington, D.C., from June 1995 through
November 1995 in accordance with generally accepted government
auditing standards.  Privatization experts in each of the countries
reviewed our material and we have incorporated their comments where
appropriate. 


--------------------
\5 See the list of related GAO products at the end of the report. 


   THE PRIVATIZATION PROCESS
------------------------------------------------------------ Letter :3

Privatization in the five countries we studied involves a number of
complex steps.  The government selects candidates for sale and
determines which must be restructured prior to divestiture.  The
government may choose to create a central unit to be responsible for
coordinating and implementing the transfer of ownership from the
public to the private sector.  To assist it in the privatization
process, the government usually hires financial advisors.  The
advisors are expected to represent the government's and the
taxpayers' interests, as well as provide guidance on how to value and
sell the entity.  The government's overall objectives for
privatization heavily influence how these steps are carried out. 


      CLEAR GOALS ARE THE
      CORNERSTONE OF THE
      PRIVATIZATION PROCESS
---------------------------------------------------------- Letter :3.1

We found that the government's goals, either for its overall
privatization agenda or for individual privatization initiatives,
influenced what entities would be privatized, how they would be
valued, what type of sale would be used, and who would be eligible to
purchase the entity.  All the governments we contacted undertook
privatization for a variety of reasons but all stated that they used
privatization primarily to increase economic efficiency and reduce
the size of the public sector.  Most also stated that they used
privatization to assist in reducing their public debt.  Some
governments clearly placed a higher priority on increasing economic
efficiency, while others gave a higher priority to debt reduction. 

In the United Kingdom, privatization was grounded in the belief that,
generally, the private sector could operate commercial enterprises
more efficiently than the public sector.  Because the decision to
sell had already been made, the entity's present value under
continued government ownership was usually not estimated.  The
government was willing to sell an entity even if it would generate
more money for the government as a public entity than the government
would receive from its sale.  The United Kingdom has also tried to
increase share ownership of stock among the general public and has
sold many entities through public offerings.  The government has
generally sold shares at a discount to employees and the public and,
as an incentive, offered installment plans to pay for the shares. 

New Zealand undertook privatization to improve economic efficiency,
reduce the government's exposure to commercial risk, and decrease
government debt.  To help achieve these goals, sales were open to the
largest possible number of bidders and foreign ownership of
privatized assets was not restricted.  We were told that
privatization has greatly enhanced the performance of certain
inefficient sectors of the economy such as the telephone industry,
which in turn has helped to make privatization more acceptable to the
public. 

During the 1980s and early 1990s, the Progressive Conservative
government in Canada privatized government corporations to increase
economic efficiency, reduce the demands that public enterprises
exerted on government management and financial resources, and reduce
government intervention in the economy.  The size of the public debt
has become a growing concern in Canada and, according to a public
debt expert, the current Liberal government has begun to portray
privatization as a way to alleviate the deficit and debt situation in
Canada, particularly through two public offerings, the Canadian
National Railroad and Petro Canada.  In the past, Canada has limited
foreign participation in asset sales, but the most recent public
offering of Canadian National placed no restrictions on foreign
ownership. 

According to documents provided by the French Treasury, the French
government sought to develop the Paris financial market through its
privatization program.  The use of public offerings has enabled
privatization to play a decisive role in shifting personal savings
into the equity market.  While preferential treatment is provided to
French residents at the time of sale, there are few legal limits on
share ownership in public offerings.  Except for companies operating
in the health, safety, and defense sectors, the only legal limit is
that non-European Union investors may not acquire securities
representing more than 20 percent of the company's equity at the time
of the initial sale.  In subsequent sales, there are no limits on
foreign purchases. 

Privatization in Mexico was part of a larger strategy to increase the
efficiency and competitiveness of the economy and increase its
credibility on the international markets.  Debt reduction has been
essential for Mexico, particularly to reestablish credibility with
its creditors.\6 To help meet its goals of increased economic
efficiency and debt reduction, the Mexican government closed, merged,
or sold 1,008 out of 1,155 public enterprises between 1982 and 1992. 
The government deposited most of the proceeds from privatization in a
separate Contingency Fund and used the funds to retire government
debt.  While some of the entities that were privatized in Mexico were
very profitable, many of the entities the government sold or shut
down were money losers.  The subsequent discontinuation of subsidies
also helped to improve the government's fiscal position. 

Mexico's constitution identifies strategic areas that must remain
within the domain of the federal government.  The constitution has
been amended over time, however, to permit certain strategic areas to
be privatized.  For example, railroads were strategic at one time and
can now be privatized.  And, while Petroleos Mexicanos (PEMEX)--the
national oil company--remains a strategic firm, an official told us
that the basic petrochemical operations of PEMEX are now being
offered for sale. 

The Mexican government restricts the level of foreign capital that
can be invested in the country, although foreign investment
regulations were liberalized at the end of the 1980s and majority
foreign ownership is allowed in most sectors.  We were told that the
level of foreign investment that should be allowed in each industry
is currently being debated by the government. 


--------------------
\6 Deficit Reduction:  Experiences of Other Nations (GAO/AIMD-95-30,
December 13, 1994). 


      CENTRALIZED APPROACH TO
      PRIVATIZATION IS COMMON
---------------------------------------------------------- Letter :3.2

A central agency or commission holds primary responsibility for the
management or oversight of the privatization process in all of the
countries in this study.  This structure has enabled a stable core of
staff to develop expertise in managing the privatization process.  It
has also allowed the governments to implement a governmentwide
approach to privatization.  Table 2 shows the entities controlling
the privatization process in each of the governments we studied. 



                                Table 2
                
                     Responsibility for Control of
                         Privatization Process

Country             Entity controlling privatization process
------------------  --------------------------------------------------
Canada              The Crown Corporation and Privatization Sector
                    group, jointly managed by the Treasury Board and
                    the Ministry of Finance, manages the sale.

France              Treasury manages the sale.
                    Privatization Commission manages valuation.

Mexico              Interministerial Commission determines how an
                    entity should be privatized.
                    Privatization offices within the Ministries of
                    Finance and Communications, and Transport
                    administer the sale.

New Zealand         Treasury manages the sale.

United Kingdom      Treasury oversees and assists responsible ministry
                    with the sale.
----------------------------------------------------------------------
In the United Kingdom, a privatization unit within the Treasury
oversees and assists the responsible ministry with the sale of public
enterprises.  The Treasury plays a coordinating role to ensure
consistent decisions across individual privatizations.  According to
a Treasury official in the United Kingdom, the government's
privatization efforts have led it to recognize the value of having a
group of dedicated officials oversee most divestitures. 

Canada had no central authority for the privatization process prior
to the late 1980s; each ministry was responsible for developing its
own privatization proposals.  Because of dissatisfaction with the
management and pace of privatization, a central authority, the Office
of Privatization and Regulatory Affairs, was established in 1986. 
The current Crown Corporations and Privatization Sector group, which
reports to both the Treasury Board and the Ministry of Finance, was
created in 1991 to oversee the management and disposal of Crown
corporations, which are wholly owned government corporations.  The
Treasury Board monitors the management of the budget and serves as a
budget scorekeeper. 


      CORPORATIZATION FREQUENTLY
      PRECEDES PRIVATIZATION
---------------------------------------------------------- Letter :3.3

The countries we studied generally converted (1) government agencies
or functions into a corporate form prior to privatization or (2)
primarily privatized entities already in a corporate form.  The
definition of a government corporation or enterprise varies from
country to country.  Government corporations are generally commercial
in character, self-sustaining or potentially self-sustaining, and may
be exempt from a variety of personnel and regulatory restrictions
applicable to government entities.  In some countries, government
corporations pay taxes. 

New Zealand has used corporatization as a way to increase the
efficiency and competitiveness of an entity while it remains within
the government and as a stepping stone for privatization.  We were
told that New Zealand state-owned enterprises (SOE), which are
entities that have been commercialized and corporatized, are very
similar to their private sector counterparts.  They pay taxes to the
government, are not subject to government budget and personnel rules,
must borrow from the private sector, and have private sector boards. 
The government, however, remains the sole shareholder.  While the
government does not guarantee the debt of SOEs, we were told that
there is some concern that offshore debt holders may assume that some
form of implicit guarantee exists. 

New Zealand primarily has privatized entities that have already been
transformed into SOEs.  The government in New Zealand has used
corporatization as an opportunity to clean up an entity's outstanding
obligations prior to privatization.  Experts stated that the
performance of entities that were corporatized and then sold has been
better than those that were not corporatized prior to privatization. 
These experts also said that the government learned it was much more
difficult to privatize a department without the restructuring and
debt reduction that corporatization engenders.  The existing
obligations and liabilities of a department complicate the sale and,
as the entity has no track record as a commercial enterprise, it can
be difficult to value. 

The United Kingdom has primarily sold nationalized industries, which
are already in a corporate form.  Canada has primarily divested Crown
corporations.  The governments in the United Kingdom and Canada have
also begun to divest departmental activities.  France has almost
exclusively sold public enterprises, and the Mexican government sold
either SOEs or their fixed assets. 


   VALUATION AND PREPARATION FOR
   SALE
------------------------------------------------------------ Letter :4

The valuation process is complex--it involves not only the mechanics
of valuing the entity, but also determining the appropriate type of
sale and the best financial and/or organizational structure for the
entity at the time of divestiture.  All of this occurs within the
overriding context of the country's privatization goals. 

Valuation is not an exact science.  It requires a great deal of
experience and depends to some extent on the professional judgment of
those conducting the valuation.  Different valuation methods may
result in different ranges of expected values depending on, for
example, the assumptions about the future performance of the entity,
the expectation of future earnings, and the level of investor
interest. 

Officials in most of the countries told us that because of this
complexity, the centralized agencies responsible for the management
of privatization hired financial advisors to assist with the
valuation process.  In the United Kingdom and France, the entity
being sold often hired its own financial advisors to represent the
entity's interests, such as the desire for a generous capital
structure.  Neither the entity nor its advisors, however, took the
lead in managing the sale process. 


      GOVERNMENT GOALS FOR
      PRIVATIZATION AFFECT USE OF
      VALUATION
---------------------------------------------------------- Letter :4.1

All the governments we studied employed a combination of valuation
techniques to estimate the value of the entity being sold and to
forecast the proceeds.  Most used present value analysis, but other
approaches were also used to develop an overall valuation. 

In the governments we studied, the valuation process served a variety
of goals.  For example, valuation entered into some governments'
decisions about whether to sell an entity.  Valuation was also used
to determine the appropriate financial and organizational structure
to maximize proceeds. 

The United Kingdom used valuation primarily to maximize proceeds
because the decision to sell had already been made.  In New Zealand,
the government relied on valuation to determine whether to sell the
entity to meet its goals of improved economic efficiency and debt
reduction.  Many of the countries also used valuation to determine a
minimum acceptable price or a price range.  We were told that, in
general, none of the governments in this study included estimated
future tax revenues from the entities sold in their estimate of
future returns to the government because many of the entities already
paid taxes and it is generally difficult to forecast tax revenues. 

France primarily uses valuation to gauge the market, minimize market
risk, and maximize the proceeds from a sale.  The French
privatization law of 1993 specifies what will be privatized; the
government, therefore, does not use valuation to compare the return
to the government of retaining as opposed to selling the entity. 
Valuation is done using a variety of analyses, including net present
value analysis. 

In determining whether to privatize an entity, New Zealand conducts
studies to estimate the market value of the entity if it were sold
compared to the returns accruing to the government from retaining the
entity.  The government's advisors conduct a cash flow analysis to
determine if the entity is worth more under government ownership or
private ownership.  When valuing the entity both under continued
government ownership and as a private sector concern, the government
uses a commercial discount rate appropriate for the industry in which
the entity is located.  If the returns from selling the entity do not
exceed the returns from government ownership, then the entity
generally is not sold. 

In Canada, the government uses valuation to assist in pricing rather
than to determine whether or not to privatize an entity.  Valuation
is used to develop a range of expected proceeds and not a minimum
acceptable price.  The government has not generally sold entities
where the sale would have been uneconomical, although money losing
entities brought low returns.  According to a privatization expert,
the government has reduced the number of people who know the details
of the privatization transactions during their final stages to help
maintain the integrity of the process. 

In Mexico the government first determined whether an entity was
indispensable; if the entity was not, the government closed, merged,
or sold it.  In cases where the entity was to be sold, the government
used valuation to maximize the proceeds from the sale.  We were told
that the government often uses the current value of future cash flows
to value an entity.  The advisors develop a minimum reference point
for the price the government should expect to receive for the entity. 
The majority of transactions have been at a price equal to or greater
than the recommended minimum amount. 


      CLAWBACKS USED TO PROTECT
      AGAINST UNDERVALUATION
---------------------------------------------------------- Letter :4.2

Both the United Kingdom and New Zealand use "clawbacks" to address
uncertainty in specific valuation situations, for example, where
assumptions crucial to the valuation may change.  Clawbacks in the
United Kingdom have been used to protect the government (that is, the
taxpayers) from new owners realizing unanticipated windfall profits\7
after privatization from the sale of surplus property.  A typical
clawback may specify that if the entity sells a certain property over
a period of 10 years for values at a specified amount greater than
the original value, a portion of the proceeds will go to the
government.  The United Kingdom's experience underscores the
importance of identifying and valuing land owned by public entities
which are to be sold.  In some instances, such land has far less
value to government than to the private sector, which may develop it. 

We were told that the United Kingdom takes a cautious approach when
using clawbacks because it recognizes that their use can decrease the
sale price as well as constrain the entity's commercial behavior. 
For example, if the government "claws back" certain gains, it may
reduce a firm's incentive to find and use new productive resources. 
According to a government official, clawbacks have been used when the
value of the property has increased after privatization, not when
operating profits were higher than expected. 

In New Zealand clawbacks have been used in a broader range of
situations.  For example, according to documents from the New Zealand
Treasury, the Petroleum Mining Licenses contract includes clauses
whereby the government receives more money if oil prices rise above
the benchmark levels used in the valuation or if reserves prove to be
in excess of the present expected reserves estimate.  New Zealand
also used a clawback in the sale of the gas reticulation system.  An
official told us that the provision specified that if the share price
increased to a specified amount by a certain date, then the company
would pay the government a certain amount, but if the price
decreased, then the government would buy back shares.  The price did
in fact decrease and the government had to buy back a percentage of
the shares. 


--------------------
\7 Such protections are not unprecedented in the United States.  In
the 1980s, warrants were issued to give the government a share in
Chrysler's future profits in return for the risks the government
incurred in offering guaranteed loans as part of the Chrysler
"bailout." Warrants represent options to purchase stock for a
specified time and price. 


      ECONOMIC FACTORS AND
      PRIVATIZATION GOALS HELPED
      DETERMINE METHOD OF SALE
---------------------------------------------------------- Letter :4.3

The governments we studied used several of types of sales in their
privatization efforts, including public offerings, private sales to
companies or individual investors, and management/employee\8 buyouts. 
The type of sale can be linked to the size of the entity being sold
and the country's financial markets.  Public offerings are generally
used in fairly well developed financial markets and for the sale of
large assets with established financial track records.  Significant
administrative costs are typically associated with a public offering,
such as developing the prospectus and marketing the sale.  In
situations where the entities to be sold are relatively small or lack
a financial track record, or where the country's financial markets
are less developed, private sales are used. 

The United Kingdom and France used public offerings to increase share
ownership and develop financial markets, respectively.  Mexico has
primarily used private sales because of the limited size of its
financial markets; New Zealand has typically used private sales
rather than public offerings, which, according to government
officials in New Zealand, are more costly to administer and involve
greater risk.  Canada has relied on both public offerings and private
sales, based primarily on the size of the entities being sold. 
According to officials in each of the five countries we spoke with,
the governments used advisors for assistance in determining the most
appropriate type of sale. 

The United Kingdom's major privatizations have been through public
offerings.  According to the government's financial advisors, public
offerings develop the greatest price competition and thus allow the
government to obtain the most value for the entity being sold. 
Initial public offerings were carried out with traditional methods,
involving underwriters and fixed price offers.  However, the United
Kingdom has moved away from using underwriters and now uses "book
building." Book building involves establishing a syndicate to ask
institutional buyers how many shares, and at what price, they will
purchase.  This establishes a range of prices and enables the
offering to be more accurately priced, in contrast to a fixed price
offer in which the share price is determined prior to the actual
offering. 

The United Kingdom has used private sales for entities where it would
not have been appropriate or cost effective to use public offerings. 
In addition, the United Kingdom used management/employee buyouts to
increase employee share ownership.  In private sales, the
government's financial advisors typically conduct a discounted cash
flow analysis to establish an internal benchmark for acceptable bids,
which is not disclosed.  An official told us that the government may
accept a price that is below the benchmark because the government's
main objective is to increase economic efficiency through
privatization, and maximizing the return to the taxpayer is
secondary.  The final price is determined by a competitive bidding
process, in which the highest bid is usually accepted.  The
government encourages management/employee buyouts, and price
preferences have been offered to management to assist with buy-out
costs.  Both the National Freight Corporation and Vickers Ship
Building and Engineering were sold to their former employees.  In
addition, provisions are made to encourage employee participation in
share offerings.  For example, the government may issue free shares
or offer discounts to employees.  Shares were purchased by 99 percent
of British Gas employees and 96 percent of British Telecom employees. 

According to a government official, New Zealand has conducted its
divestitures mainly through private sales, rather than through public
stock offerings, because such sales are less expensive to administer,
require fewer warranties and indemnities, result in a maximized
return and minimize the risk of over- or under-pricing.  In order to
maximize returns, New Zealand sold entities to the highest bidder and
was willing to sell to foreign owners.  Management/employee buyouts
are permitted, but only as part of the competitive bidding process. 
We were told that buyout bids are rarely the highest bids and are
therefore usually unsuccessful. 

In Canada, the government uses both public offerings and private
sales, depending on the size and type of entity being sold.  The
government uses underwriters for public offerings and large offerings
have been completed in several stages.  According to a privatization
consultant, the Canadian government always tries to pay attention to
employee interests because if this is not done, employee concerns can
potentially derail the sale.  We were told that management/employee
buyouts had not been used at the time of our review. 

Mexico has primarily used private sales for its privatizations
because it has not yet had the capital markets to support public
offerings.  The sales are conducted through a competitive bidding
process with a sealed bid.  Since the price is the most important
consideration in the assessment, the highest bid generally wins. 

France generally uses public offerings to sell public enterprises,
but it has also used negotiated sales (private sales on an auction
basis).  Financial advisors provide the Privatization Commission with
a range of expected prices, from which the Commission determines a
minimum acceptable value.  The government then uses book building to
gauge the market, facilitate placement of the offering, and reduce
market risk.  The sale price the government will accept cannot be
below the minimum value. 

In France, the government is required to include employees in public
offerings.  A 10-percent quota of the shares sold on the open market
was reserved for employees of the privatizing entity.  Price rebates,
up to a maximum of 20 percent, could be granted.  However, if the
price rebate exceeded 5 percent, the employees had to retain the
shares for a specified period, which was generally 2 years. 


--------------------
\8 According to the World Bank, a management/employee buyout is a
technique whereby the managers and employees acquire a controlling
interest in the company.  The buyout may involve the use of credit to
finance the acquisition, with the assets of the acquired company
generally used as security. 


   RESTRUCTURING FOR SALE
------------------------------------------------------------ Letter :5

Public entities were often restructured to improve their salability
or to engender competition.  Financial restructuring might be needed
to mitigate the entity's debt and/or existing liabilities, such as
pension obligations and environmental liabilities.  Organizational
restructuring might also be necessary to break up a monopoly and
introduce competition.  Determining both the current and future
status of an entity's existing obligations was therefore often
considered a necessary step in the valuation process.  For these five
countries, such obligations included underfunded pension commitments,
post-retirement health benefits, environmental cleanup costs, and
debt.  Governments decided whether to retain responsibility for the
remaining liabilities or to sell them with the entity.  The market
price can be expected to increase for an entity sold with fewer
liabilities, particularly liabilities with uncertain costs. 
Organizational restructuring may also be necessary.  If the entity is
a monopoly, it may need to be broken up prior to the sale or
regulations may need to be put in place to protect the consumer. 
Whether or not an entity is sold as a monopoly may also affect the
price the government receives from the sale. 


      RESTRUCTURING OF DEBT AND
      LIABILITIES USUALLY OCCURS
      PRIOR TO CORPORATIZATION OR
      SALE
---------------------------------------------------------- Letter :5.1

Governments determine, either on a case-by-case basis or as an
overall policy, how an entity to be privatized will be structured for
sale.  The market price of an entity is reduced by the liabilities
that come with it; the price may be reduced further by the risk
premium associated with any uncertain liabilities.  All governments
in this study retained some amount of debt associated with entities
to be sold, and generally paid the balance on under-funded or
unfunded employee obligations. 

All of the governments used public resources to restructure entities
in an attempt to make them viable competitive firms.  Officials in
all of the countries, however, stated that the government does not
generally put a significant amount of new investment in an entity
prior to sale and many stated that this was because the private
sector is believed to be better able to make investment decisions. 

The United Kingdom has undertaken substantial restructuring of debt
and liabilities to make the entities economically attractive to
investors.  According to an official in the United Kingdom, the
government may retain a portion of the entity's debt.  In addition,
the government ensures that pension programs are properly funded
prior to the sale of the entity.  For example, prior to the sale of
the National Freight Company, the government paid 47 million pounds
into the pension fund; the government also retained 1,250 million
pounds of British Telecom's underfunded pension liability. 

New Zealand generally restructures entities when they are converted
into a corporate form (that is, into a state-owned enterprise). 
Since the government usually corporatizes before selling an entity,
it addresses issues pertaining to outstanding obligations and
liabilities during the corporatization process rather than during
sale preparation.  The government decides whether to retain or
transfer these obligations and liabilities to the newly created SOE
on a case-by-case basis.  According to a privatization expert,
pensions in New Zealand are not underfunded, but the personnel and
liability issues that remain, such as the transfer of the pension
plans to the private sector, are sorted out during the
corporatization process. 

We were told that in France public enterprises are under commercial
law and public enterprise employees do not generally have civil
service status; thus, there are few changes for the employees as the
result of a sale.  A government official told us that France, with a
few exceptions, only sells entities that are in good financial
condition and that most of the enterprises that have undergone
privatization have not required major financial restructuring. 

The Canadian government tries to ensure that the entity to be sold is
commercially viable.  In preparing Crown corporations for sale, the
government usually retained some of the debt and other liabilities,
but this varied depending on the entity being sold.  The goal of the
government is to reduce liabilities to the point where the
corporation is able to operate viably in the private sector.  We were
also told that the Canadian government provides generous severance
payments and that their cost can be significant. 

In Mexico, the government identifies the entity's unfunded
obligations prior to the sale of the entity.  We were told, however,
that this does not mean the government will necessarily retain the
liability or pay off the unfunded costs.  The government quantifies
the existing liabilities so that the bidder knows the status of the
entity that is for sale.  In some privatizations, the government may
retain all of the debt or liabilities, while in other instances the
government clearly identifies the liabilities and/or debt and the
prospective owner agrees to pay the costs.  In some cases, the entity
would not have been saleable if the government had not retained its
large debt. 

An official in Mexico told us that any employee layoffs usually
occurred after a firm was privatized.  An employee who is dismissed
is entitled to a minimum of 3 months pay plus a seniority bonus,
which is equal to as much as 20 days per year of service.  When a
firm with staff having above average seniority is sold, the potential
for the seniority bonus is disclosed in the sales transaction. 

Existing and future environmental liabilities can also represent a
large cost.  We were told that in Mexico the government performs an
audit to document existing environmental liabilities and provides the
written report to the bidders.  In some instances, the government
will assume responsibility for the clean-up, and in other cases the
bidder will buy the entity with certain liabilities intact.  In
either case, uncertainty about these liabilities has been reduced. 


      GOVERNMENTS TRY TO ENSURE
      COMPETITION
---------------------------------------------------------- Letter :5.2

Officials we interviewed said that the presence or absence of
competition is very important in determining how and what to
privatize.  Some of the governments that sold monopolies either (1)
tried to create competition by eliminating the monopoly statutes that
had prevented competitors from entering the market or (2) broke up
monopolies, thereby injecting competition.  Governments in France and
New Zealand will not privatize monopolies.  New Zealand will not sell
natural monopolies\9 because they are economically inefficient. 
France does not sell monopolies because the government believes that
certain public functions, such as the provision of public utilities,
require a monopolistic structure to ensure equal access to high
quality service.  As a result, France has not privatized certain
entities that other countries have privatized. 

The United Kingdom has sold natural monopolies, but in each case it
established a regulatory body with the responsibility of preventing
the abuse of monopoly powers.  An official stated that during the
early stages of the United Kingdom's privatization program, the
government sold natural monopolies along with the monopolies' related
business units.  For example, the gas industry was sold as one
company, meaning that the pipe network (the natural monopoly) was
sold with its business units, such as those that bought gas or those
that distributed gas.  Thus, the natural monopoly was in a strong
position to abuse its power because of the vertical and horizontal
integration.  The United Kingdom has learned from this experience and
now tries not to privatize natural monopolies with their related
business units.  The government tries to break up the monopoly so
that the portions that could be competitive are separated, thus
leaving only the natural monopoly to be regulated. 

A privatization expert in Mexico stated that the government has
learned important lessons from the sale of intact monopolies.  The
telephone company in Mexico (TELMEX) was sold intact.  The government
received significant revenues from the sale of the monopoly, and
therefore, initially considered the sale a success.  However, the
taxpayer benefitted little in terms of prices or service.  The
government's policy is now to attempt to update the regulations and
the structure of the industry or entity prior to its sale. 

We were told that the New Zealand government has a policy not to sell
natural monopolies.  It will, however, sell statutory monopolies once
the legislation that created the monopoly has been removed and the
entity has been restructured to allow competition in the industry. 
We were also told that even though entities with monopoly rights
generate a higher price, New Zealand has decided not to sell
monopolies because they would not enhance economic efficiency if
transferred to the private sector. 

For example, New Zealand Telecom was de-monopolized and new firms
were encouraged to enter the market prior to its privatization. 
Also, an official told us that New Zealand sold its railroad, but
only after repealing the law requiring rail freight transport for
distances exceeding 100 miles.  This, in effect, permitted other
forms of transport to compete.  In contrast, the air traffic control
system, which is a natural monopoly, has been corporatized, but there
are currently no discussions of privatizing it. 

France has not included monopolies in its privatization program. 
According to Treasury documents, this decision stems from the premise
that certain activities must be strictly regulated if overall
effectiveness is to be reconciled with consumer protection.  For this
reason, France's major public services, including electricity, gas,
telecommunications, and rail transport, have not been privatized. 
The monopoly statutes of some of these services, however, are due to
expire in the near future.  A Treasury official in France told us
that the government is considering the privatization of some of these
entities, including France Telecom, whose monopoly statute will
expire in 1998. 

Competition is a factor in Canada in determining whether or not to
privatize, but the government has in some cases privatized where no
competition exists.  In these cases, the government established a
regulatory regime prior to the sale.  This is discussed in greater
detail in the next section. 


--------------------
\9 A natural monopoly arises when the entire output of an industry
can be most efficiently produced by a single firm, for example, when
the firm has significant economies of scale.  For this reason natural
monopolies are often regulated or government run.  Statutory
monopolies are monopolies where an exclusive right to sell is granted
by law, and may include natural monopolies. 


      REGULATION CONTINUES TO PLAY
      A ROLE IN PRIVATIZED
      INDUSTRIES
---------------------------------------------------------- Letter :5.3

Many of the countries we spoke with continued to regulate their
former monopolies, even after breaking them up.  These governments
expressed the view that some degree of continued control of rates and
services in what were previously public functions was necessary to
protect the interests of the consumer and ensure economic efficiency. 

As discussed above, the United Kingdom establishes a regulatory body
with responsibility for regulating natural monopolies and promoting
competition.  For example, price formulas are used that in most cases
limit the annual price increases to no more--and usually less--than
the rate of inflation.  In addition, competition is encouraged by
breaking out the potentially competitive segments of the monopoly and
restricting their activities, thus allowing other firms to enter into
the market. 

The New Zealand government has used "Kiwi Shares" to protect
consumers.  According to a government official, a Kiwi Share is a
single share of the privatized entity that is held by the government
and provides the government with regulatory authority to enforce
conditions of the sale.  However, the Kiwi Share has no voting or
income distribution rights.  For example, in the privatization of New
Zealand Telecom, a Kiwi Share was used to protect rural telephone
service.  It was feared that once New Zealand Telecom was sold, rural
service would either decrease or its price would increase
significantly.  The Kiwi Share limited future price increases for
rural service to no more than the annual rate of overall price
inflation. 

The sale of Teleglobe Canada, a Crown corporation with a monopoly on
international communications, is an example of Canada's sale of an
intact monopoly.  The corporation was not subject to regulation prior
to its sale, and the privatization process was long and complex,
particularly because of unresolved issues, including questions
relating to regulatory policy.  The government knew that higher rates
would raise the value to the bidder and the government.  Higher
rates, however, were unpopular with the Canadian public.  The final
regulatory agreements allowed Teleglobe to retain its monopoly status
for at least 5 years, but required it to reduce its rates. 


   BUDGET DISPLAY AND USE OF SALE
   PROCEEDS
------------------------------------------------------------ Letter :6

Most of the governments in this study use any cash proceeds that
result from privatization to reduce debt and interest costs and do
not permit proceeds to be used to offset ongoing spending.  However,
according to various government officials, proceeds have sometimes
been used to finance ongoing spending.  Many of the governments
display proceeds from privatization both within and distinct from
their government's annual budget deficit or surplus numbers.  How a
government incorporates privatization proceeds into its budget has
important implications for deficit reduction.  If the proceeds are
included within the budget, the government's deficit for that year
will be reduced by the nonrecurring privatization proceeds.  In
concept, this could lessen the pressure to identify spending
reductions in ongoing operations.  Decreasing the spending levels of
ongoing operations can result in long-term budgetary savings, while
the proceeds from privatization provide only a one-time offset to the
deficit. 

Although governments talk of using privatization proceeds to reduce
debt, technically, a country cannot actually begin to reduce its
nominal government debt unless it is in fiscal balance or has a
budget surplus.  Nevertheless, when a government sells assets, the
sale proceeds will reduce the country's borrowing requirements from
what they would have been and, as a result, the debt servicing costs
will also be reduced. 


      PRIVATIZATION PROCEEDS
      RESERVED TO REDUCE PUBLIC
      DEBT BUT MAY FINANCE ONGOING
      SPENDING
---------------------------------------------------------- Letter :6.1

Mexico has earmarked most of the proceeds from privatization for debt
reduction.  Government officials in Mexico told us that they strongly
believe that nonrecurring revenues from privatization should not be
used for ongoing operations.  The government created a Contingency
Fund in which the revenues from privatization have been set aside as
reserves to deal with external shocks or to cancel public debt. 
Government officials told us that most of the proceeds from
privatization have been placed in this fund and used to retire
government debt.  According to a budget official, the government
presents its budget and deficit numbers with and without the proceeds
from privatization in order to discourage using the proceeds for
ongoing operations. 

New Zealand has also used proceeds from privatization primarily for
debt reduction.  The government displayed the sale proceeds on-budget
but drew a line to signify that they were not included in what the
government called the "adjusted deficit." The proceeds were used to
reduce the government's borrowing requirements when the government
was in deficit, thus reducing debt servicing costs; when the
government reached budget surplus, the proceeds were used to buy down
debt.  The proceeds were not used to offset expenditures and the
deficit reduction that results from privatization appears in addition
to planned spending reductions. 

France has generally used the proceeds from privatization to reduce
its borrowing requirements.  According to documents provided by the
Treasury, between 1986 and 1988, about two-thirds of any proceeds
from privatization were earmarked for debt reduction.  More recently,
however, these same documents state that the proceeds have been used
for general budget appropriations and to sustain the economy through
a period of reduced growth.  A substantial portion of the proceeds
from the current privatizations is being used to retain programs
designed to cushion the impact of a recession by assisting the
unemployed in finding new jobs. 

In Canada, the impact of privatization on the reported budget deficit
is the difference between the realized proceeds of the sale and the
recorded value.  For example, according to a government official, if
an entity is recorded in the public accounts at Can$1 billion and the
proceeds from the sale equal Can$1 billion, the sale will have no
on-budget effect on the reported deficit.  If the proceeds exceed the
recorded value, for example, if they equal Can$1.2 billion, the
reported deficit will be reduced by the amount that is greater than
the recorded value, that is, by Can$0.2 billion.  This Can$0.2
billion must, by law, be deposited in the Debt Servicing and
Reduction account.  The funds in this account are to be applied to
the annual interest costs on government borrowing and ultimately to
buying down debt.  The proceeds are used to reduce the government's
borrowing requirements. 

In the United Kingdom, privatization proceeds are considered negative
expenditures.  The proceeds are not earmarked for specific purposes,
however, but are generally deposited in the Consolidated Fund along
with other government receipts.  Government officials stated that the
proceeds are used to decrease the public sector borrowing
requirement, which in the United Kingdom is defined as all receipts
and expenditures at all levels of government, including borrowing by
nationalized industries, debt interest, and privatization proceeds. 
The Treasury does not use the proceeds to make room for additional
expenditures in programs that have a cash limit, but one official
stated that he believed that the privatization proceeds have weakened
the downward pressure on expenditures that Treasury tries to apply. 


   MATTERS FOR CONGRESSIONAL
   CONSIDERATION
------------------------------------------------------------ Letter :7

The ways in which governments we studied implemented privatization
programs and the lessons those policymakers learned could help the
United States in evaluating and, ultimately, carrying out
divestitures currently under consideration.  As the debate over such
proposals suggests, there are issues in the United States regarding
how best to evaluate a proposal to sell, who should manage the
valuation and sale processes, how to estimate future proceeds, how
the sale should be structured, and how the proceeds should be treated
in the budget. 

The experiences in the governments we examined suggest that often no
single answer is widely applicable to all governments in all
situations.  Nonetheless, the information these governments provided
may help the United States smooth the transfer of viable operations
from the public to the private sector.  Further, some specific
elements of other governments' practices may have particular
relevance to issues the United States faces today. 


      CONSISTENT MANAGEMENT
---------------------------------------------------------- Letter :7.1

All the countries we studied kept management or oversight of the
privatization process in their Treasury or central financial
ministry.  A government representative in one country told us that
doing so allowed the government to build upon early divestiture
experiences.  The representative also noted that because the
management of the entity to be sold had different and sometimes
conflicting interests than those of the central financial agency, the
latter maintained responsibility for most aspects of sale
structuring. 

External financial advice was also necessary.  The governments we
consulted rely heavily on private sector expertise in estimating
market values and structuring sales.  These advisors generally
reported to the finance ministry charged with managing the
divestiture, not to the entity being sold. 

The U.S.  government has embarked on only two large divestitures in
the recent past and, therefore, has had little reason to create a
centralized process for managing such sales.  The Department of
Transportation was responsible for managing the sale of Conrail and
the Department of Energy oversaw the Great Plains Coal Gasification
sale.  More recently, the Department of the Treasury has played an
active role in concurring with key decisions in the sale of the
United States Enrichment Corporation (USEC); however, as we observed
in our report on these preparations,\10 the privatization plan USEC
prepared clearly states that USEC and its board of directors will
play the lead role in determining how and when the key decisions will
be made. 

Although the U.S.  government cannot privatize as many operations as
other countries such as the United Kingdom and New Zealand have, more
such proposals are under serious consideration in the United States. 
This suggests that considering a consistent management process would
prove beneficial.  Assigning responsibility for all divestitures to a
single agency could take advantage of the "learning curve," as these
other governments did, by applying expertise gained from earlier
privatizations to subsequent sales.  Doing so unambiguously could
also help clarify who represents the government in the sales
transactions and remove any appearance of conflict.  This continuity
of experience could also provide the expertise required to identify
situations in which the use of special techniques such as clawbacks
or warrants on windfall profits would be appropriate.  In our report
on USEC's privatization plan, we stated that the Treasury should have
the lead role since Treasury officials, unlike USEC's managers and
its board, will not be directly affected by the privatization and
will therefore be better able to protect taxpayer interests.  The
experience of other governments also suggests that the U.S. 
government might usefully consider assigning the lead role in all
divestiture preparations and management to a central financial
agency, such as the Treasury Department. 


--------------------
\10 Uranium Enrichment:  Process to Privatize the U.S.  Enrichment
Corporation Needs to Be Strengthened (GAO/RCED-95-245, September 14,
1995). 


      BUDGET INCENTIVES
---------------------------------------------------------- Letter :7.2

According to officials, the stated policies of most of the
governments we studied do not permit the proceeds from asset sales to
offset ongoing spending; however, such offsets have apparently
occurred from time to time.  These policies exist for the same reason
that current U.S.  budget rules do not permit proceeds from asset
sales to be scored:  using one-time revenues to finance new spending
allows the appearance of balance in the short run while creating
greater imbalance in the long run. 

A major issue under current U.S.  budget law pertains to the fact
that congressional committees that have jurisdiction over entities
being privatized are not permitted to "score" the proceeds from asset
sales for budget enforcement purposes; this means that they cannot
use the proceeds to offset additional expenditures within their
budget allocation.\11 The privatization proceeds reduce the
government's current borrowing requirements from what they might
otherwise have been, but do not, however, "count" towards the deficit
reduction goals specified under the Budget Enforcement Act of 1990,
as amended.  These scoring rules may result in a non-neutral budget
situation.  While the proceeds are not scored, any outlays--such as
those necessary to fund underwriters for the sale--or revenue losses
associated with the sale of a revenue-generating entity are scored. 

Therefore, concerns that U.S.  budget rules carry disincentives to
privatize have merit.  Because the costs of divestiture--including
the loss of the entity's stream of future net revenues--are counted
while sale proceeds are not, in this budgetary environment, it is
difficult to sell money-making operations unless an offsetting change
in receipts or mandatory spending can be found.  Current budget rules
favor retaining profit-making operations--the very entities most
likely to appeal to potential buyers and least likely to require
government subsidies--regardless of the economic or even fiscal
arguments for moving these businesses to the private sector. 

We found that budget rules that prevent the use of one-time proceeds
to finance ongoing spending are widely used.  However, budget rules
should not dominate the divestiture decision; the decision to
privatize should be made on other grounds.  Therefore, the Congress
may wish to consider ways to neutralize the scoring.  It would be
possible to alter budget rules to permit the use of sale proceeds
only to offset any costs associated with implementing the sale plus
any loss of net revenues now and in the future.  Remaining proceeds
could be used to reduce the government's current borrowing
requirements. 


--------------------
\11 In the United States, liabilities held by the government are not
generally recognized in the budget, nor are they recognized if
retained as a condition of the sale. 


---------------------------------------------------------- Letter :7.3

We are sending copies of this report to the President of the Senate,
the Speaker of the House of Representatives, and the Chairmen and
Ranking Members of the House and Senate Budget Committees.  We are
also sending copies to the Director of the Congressional Budget
Office, the Secretary of the Treasury, and the Director of the Office
of Management and Budget.  Copies will be made available to others
upon request. 

This work was performed under the direction of Barbara Bovbjerg,
Assistant Director.  Other major contributors were Hannah Laufe,
Evaluator-in-Charge, and Sheri Powner, Evaluator.  Please contact me
at (202) 512-9142 if you or your staff have any questions. 

Sincerely yours,

Susan J.  Irving
Associate Director, Budget Issues


PREVIOUS DIVESTITURES OF U.S. 
GOVERNMENT ASSETS
=========================================================== Appendix I


   CONRAIL
--------------------------------------------------------- Appendix I:1

In 1987, the Department of Transportation (DOT) sold Conrail through
a public offering, which resulted in net proceeds to the government
of $1.575 billion.  The government's goals for privatizing Conrail
included providing for the long-term viability and continuation of
rail service in the Northeast and Midwest, protecting the public
interest in a sound rail transportation system, and, to the extent
not inconsistent with these purposes, securing the maximum proceeds
possible from the sale.  The government met its primary goals for the
sale of Conrail, in that it ensured the continuation of viable rail
service, but only after spending about $8 billion creating,
subsidizing, and preparing Conrail for sale. 

Conrail was created in 1976 as a for-profit government corporation
resulting from the consolidation of seven bankrupt railroads.  The
government was given an 85-percent common stock interest in the
company.  The other 15 percent of Conrail's common stock was held
through an employee stock ownership plan.  The Congress, however,
spent over $7 billion on Conrail-related activities through 1988. 
This included funds to purchase the properties of the bankrupt
railroads, operating subsidies and capital improvements, and employee
buyouts. 

By the end of 1980, however, Conrail had accumulated substantial
operating losses.  In 1980, the Congress passed the Staggers Rail Act
which authorized substantial deregulation of rail transportation.  In
1981, the Congress passed the Northeast Rail Service Act (NERSA) to
help Conrail reach profitability.  NERSA enabled Conrail to expedite
abandonment of unprofitable lines and transfer commuter services to
other operators, established a government-funded severance program,
provided funding for certain supplemental unemployment benefit
payments, and exempted Conrail from state taxes.  After these
measures were enacted, Conrail began reporting operating profits. 

NERSA also authorized DOT to hire an investment advisor and, if
Conrail was found to be operating profitably, to sell Conrail.  DOT
favored a sale to a single buyer whose financial strength would
ensure Conrail's future in the private sector.  However, Conrail
management and some Members of the Congress favored a public stock
offering.  On October 21, 1986, the Congress provided authority for
the public offering through its passage of the Conrail Privatization
Act, which required DOT to select six investment banks to manage the
sale of the government's interests in Conrail.  On March 26, 1987,
DOT made a public offering of Conrail's stock. 


   THE GREAT PLAINS COAL
   GASIFICATION PROJECT
--------------------------------------------------------- Appendix I:2

The Great Plains Coal Gasification Project was designed to produce
pipeline quality synthetic natural gas from coal.  In 1982, the
Department of Energy (DOE) awarded a loan guarantee to a partnership
of five energy companies for the plant's construction and start-up. 
In 1985, the partnership defaulted on its DOE guaranteed $1.5 billion
loan from the Federal Financing Bank, and DOE acquired control of and
then title to the project.  Operation of the plant continued under
the original plant operator for the next 3 years.  During this time,
the plant was profitable, and project revenues exceeded expenses by
about $110.3 million. 

In 1986, DOE announced it would sell the Great Plains project and
subsequently hired Shearson Lehman Hutton, Inc., to assist it in
doing so.  In 1988, DOE selected the Basin Electric Power Cooperative
as the preferred purchaser for the Great Plains project.  Basin was
one of nine prospective purchasers that submitted firm offers. 
According to DOE, Basin provided the highest offer and the strongest
commitment to the project.  DOE received $85 million at the sale
closing and a commitment for DOE to share in future revenues from
plant operations. 





RELATED GAO PRODUCTS
=========================================================== Appendix 0

Sale of NPRs and Oil Shale Reserves (GAO/RCED-96-28R, October 17,
1995). 

Federal Electric Power:  Operating and Financial Status of DOE's
Power Marketing Administrations (GAO/RCED/AIMD-96-9FS, October 13,
1995). 

Uranium Enrichment:  Process to Privatize the U.S.  Enrichment
Corporation Needs to Be Strengthened (GAO/RCED-95-245, September 14,
1995). 

Terminating Federal Helium Refining (GAO/RCED-95-252R, August 28,
1995). 

Tennessee Valley Authority:  Financial Problems Raise Questions About
Long-term Viability (GAO/AIMD/RCED-95-134, August 17, 1995). 

Sale of NPR-1 (GAO/RCED-95-255R, August 1, 1995). 

Naval Petroleum Reserves (GAO/RCED-95-141R, March 17, 1995). 

Uranium Enrichment:  Observations on the Privatization of the United
States Enrichment Corporation (GAO/T-RCED-95-116, February 24, 1995). 

Letter to Honorable William V.  Roth, Jr.  Discussing Privatization
Experiences in Other Countries (B-260308, February 6, 1995). 

Naval Petroleum Reserve:  Opportunities Exist to Enhance its
Profitability (GAO/RCED-95-65, January 12, 1995). 

Mineral Resources:  H.R.  3967 - A Bill to Change How Federal Needs
for Refined Helium Are Met (GAO/T-RCED-94-183, April 19, 1994). 

Federal Electric Power:  Views on the Sale of Alaska Power
Administration Hydropower Assets (GAO/RCED-90-93, February 22, 1990). 

Lessons Learned About Evaluation of Federal Asset Sale Proposals
(GAO/T-RCED-89-70, September 26, 1989). 

Synthetic Fuels:  An Overview of DOE's Ownership and Divestiture of
the Great Plains Project (GAO/RCED-89-153, July 14, 1989). 

Federal Assets:  Information on Completed and Proposed Sales
(GAO/RCED-88-214FS, September 21, 1988). 

Conrail Sale:  DOT's Selection of Investment Banks to Underwrite the
Sale of Conrail (GAO/RCED-87-88, February 17, 1987). 

*** End of document. ***