Employee buy‐outs and privatization: Issues and implications for LDCs and post‐communist countries of UK experience

Privatization has become an international phenomenon. Most attention has been devoted to privatization by stock market flotation or by sales to third parties. Management and employee buy‐outs present a third main possibility for transferring assets from the public to the private sector. This paper discusses the scope for privatization buy‐outs in LDCs and ‘post‐communist’ economies in the light of conceptual issues and UK experience. The positive aspects of privatization by management and employee buy‐outs concern: ownership incentives; the introduction of control mechanisms by institutional investors and various types of financing instruments; indigenous ownership, decentralized privatization; greater incentives in firms where specific skills are involved; the ability to improve trading relationships between a privatized supplier (the buy‐out) and its former parent, which remains in the public sector where the supplier is heavily dependent on its former parent; and the general contribution of buy‐outs to a redrawing of a state firm's spread of activities to create a more viable entity. The potential problems with buy‐outs concern such issues as: absence of entrepreneurial skills; the scope of their applicability; the potentially restrictive effects of debt and debt‐like finance; the need to deal with investment requirements of firms; the lack of personal wealth; the use of inside information by managers to purchase a firm at a price which is to the detriment of the public interest; and the possibility of social and political problems if individuals are perceived to enhance their personal wealth significantly as an accident of where they work. There are means by which many of these potential problems can be dealt with and the paper addresses these.