PRIVATISATION OF PUBLIC UTILITIES

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PRIVATISATION OF PUBLIC UTILITIES

• Bucharest, 09 APRIL 2002

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CONTENTS
1. EXECUTIVE SUMMARY 2. CSFB UTILITIES
EXPERTISE 3. PRIVATISATION OBJECTIVES 4. KEY
ISSUES 5. APPROACH AND METHODOLOGY 6. CASE
STUDIES
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EXECUTIVE SUMMARY
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EXECUTIVE SUMMARY

• I am pleased to have this opportunity to present
  on the privatisation alternatives for the
  Romanian utilities
• CSFB has substantial experience in advising
  Governments on the privatisation of their
  utilities
• Former and present clients include the
  Governments of Argentina, Australia, Brazil,
  Colombia, Philippines, Poland, Slovakia, Ukraine
  and United Kingdom
• CSFB has been ranked 1 utilities privatisation
  advisor since 1992
• Numerous alternatives are available to the
  Government in respect of the privatisation of its
  utilities
• The chosen approach needs to meet the Government
  overall objectives
• Each alternative should be evaluated within its
  timing and value implications
• Depending on the readiness of the sector, a two
  phase approach may be most appropriate
• Phase 1 review, restructure and determine
  overall privatisation plan within the context of
  the Government objectives
• Phase 2 implement chosen privatisation strategy

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CSFB UTILITIES EXPERTISE
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CSFB UTILITY PRIVATISATION EXPERIENCE
US 1,900,000,000
US 11,000,000,000
Advised the city of Berlin on privatisation
of 50.8 of Bewag
Advised Government of Spain on sale of 68 stake
in Endesa
Source Thomson Financial Securities Data Co., 18
June 2001. Since 1992
1997
1997
1,500,000,000
US 17,000,000,000
US 6,000,000,000
Advised the UKGovernment on privatisation of
British Energy
Advised Governmentof Argentina of 16 energy and
utility assets privatisation
Advised Governmentof Australia on privatisation
ofVictoria electricity andgas industries
1996
1995 1997
1991 1997

• CSFB is ranked 1 in utility privatisations
  worldwide

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CSFB UTILITIES EXPERTISE

• UNITED KINGDOM
• Advised Innogy on its pending asset swap
  transaction with Northern Electric plc (2.1 bn)
• Advised Innogy on the acquisition of Yorkshire
  Power for a cash consideration of 508.6m
• Advised Innogy on the acquisition of Yorkshire
  Power for a total consideration of 1.9bn
• Advised Innogy on demerger from National Power
  (2.8bn)
• Privatisation of British Energy (2.3bn)
• Advised Cal Energy on acquisition of Northern
  Electric (1.6bn)
• Global Co-ordinator in IPOs of PowerGen, National
  Power and 12 RECs
• Advised Southern Electric on 7.6bn merger with
  Scottish Hydro
• Advising UK Govt on privatisation of BNFL
• FRANCE
• Advised Electricité de France on the acquisition
  of Dalkia (Vivendi SA) (1.4bn)
• Advised Electricité de France on acquisition of a
  stake in ESTAG (0.5bn)
• Lead managed Electricité de France notes due 2001
  (200m)
• SPAIN
• Advisor to Endesa on acquisition of Iberdrola
• Advised Spanish Government on sale of 68 stake
  in Endesa (4bn)
• Advised on 2.7bn acquisition of 8 Spanish
  regional utilities by Endesa
• PORTUGAL

• SCANDINAVIA
• Advised Incentive AB on disposal of AB
  Skandinaviska Elverk (1.1bn)
• Participated in loan facility for Vattenfall
  Treasury AB (600m)

• CENTRAL EUROPE
• Advised the Slovak Government on the
  privitatisation of SPP, its gas monopoly
• Advising the Government of Ukraine on
  privatisation of further 12 distribution
  companies
• Advised Ukrainian government on privatisation of
  6 distribution companies
• Arranged loan facility for Slovenske Elektra
  (111m)
• Lead managed 200m debt offering for CEZ
• GERMANY
• Advised E.ON on concurrent sale of VEBA Öl and
  acquisition of Ruhrgas stake from BP (7.7bn)
• Advised VEW on merger with RWE (4bn)
• Advised Fortum on acquisition of EW Wesertal
  (380m)
• Only non-German bank on IPO of MVV
• Advised City of Berlin on privatisation of Bewag
  (1.9bn) to E. ON and Mirant
• Advising Mirant on acquisition of further Bewag
  shares from E. ON and a stake in VEAG/Lambag
• Advised on merger of Badenwerk and EVS to form
  EnBW (6.5bn)
• Advised VEW/MEAG on acquisition of Stadrwerke
  Leipzig (650m)
• GREECE
• Arranged loan facility for Public Power Corp
  (220m)
• Acted as bookrunner in PPCs issuance of ITL340bn
  due 2004 and 500m 41/2 notes due 2009

• AUSTRIA
• Advised EdF on acquisition of strategic minority
  stake in ESTAG
• SWITZERLAND
• Advised Swiss Railways on divestiture of various
  electricity generation and grid assets
• Advised CS Holding on divestiture of 44.9 of
  Watt AG (1.7bn)
• ITALY
• Advising ENEL on the divesture of 15,000MW of
  generation assets
• Advised City of Milan on IPO of 49 stake in AEM
  Milano (0.8bn)
• Advised Comune di Torino on privatisation of a
  48 stake in AEM Trino (Not disclosed)

• Over the past 5 years, CSFB has advised utilities
  or governments on all major transactions in the
  European utilities sector

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PRIVATISATION OBJECTIVES
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PRIVATISATION OBJECTIVES

• The motivation for the restructuring and
  privatisation of the energy industry can be
  driven by numerous objectives
• Reduce the cost of energy supplies to consumers,
  whilst improving service
• Increase efficiency, improving managerial
  performance and accountability
• Initiate market forces to the energy markets
• Compliance with European Directives
• Encourage and facilitate technology transfer
• Raise revenue for the Treasury
• Raise investment capital for the industry or
  company undergoing transformation
• Re-position governments role in the industry to
  essential regulatory oversight
• Encourage foreign investment
• Develop domestic equity capital markets

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PRIVATISATION OBJECTIVES (contd)
OBJECTIVE
MODEL
ADVANTAGES
Maximise proceeds
Sell controlling stake to strategic investor
Australia improved their fiscal deficit and
obtained lower electricity and gas rates
Sell to a strategic investor
Acquire new technology and increase efficiency
Argentina significantly reduced the cost of
electricity and gas
Fast track process
Sell controlling stake to strategic investor
Ukraine attracted top-quality companies to
operate their distribution companies in less than
10 months, during the period of relative
political uncertainty in the country
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PRIVATISATION OBJECTIVES (contd)
OBJECTIVE
MODEL
ADVANTAGES
Domestic public offering
Develop capital markets
In Latin America, privatisation offerings have
been unsuccessful in developing capital markets
because of culture of low saving large flow-backs
The UK privatised its companies through IPOs.
Strategic investors later acquired most of the
privatised companies at higher premiums
Gain political support/improve image
Sell controlling stake through public offering
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KEY ISSUES
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KEY ISSUES

• Several key issues would need to be addressed to
  ensure that the Government privatisation
  objectives are met
• Industry structure model
• Clear separation between generation /purchasing,
  transmission, distribution and supply / Creation
  of vertically integrated utilities
• Level of regulation vs. competition
• Regulatory Framework
• Status of Industry Regulator
• Rate of Return / Performance based regulation
• Readiness of the industry for privatisation
• Accounting / Technical / Environmental / Legal
• European Energy Directives
• Compliance required prior to accession to EU

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INDUSTRY STRUCTURE MODELS (ELECTRICITY)
There are four general industry structure models
differentiated by degree of competition. The
choice of the initial structure will greatly
depend on timing and value considerations,
overall industry readiness as well as resources
available
1. MONOPOLY
2. SINGLE BUYER
3. WHOLESALECOMPETITION
4. RETAILCOMPETITION
Generator(s)
Purchaser/Wholesaler
Distribution/Retail
Consumer

• Customers choose their retailers under full
  competition

• Distribution companies buy direct from producers
  (or through aggregators)

• Single buyer chooses from

• Vertically-integrated

INCREASING COMPETITION AND COMPLEXITY BUT
EXPECTED LOWER PRICES
The choice of initial model should not prevent
the Government from achieving its ultimate goals,
and to the extent desired, complying with EU
Electricity Directives
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REGULATORY FRAMEWORK
Rate of Return Approach
Advantages
Disadvantages

• Inability to effectively promote productive
  efficiency, which can lead to dynamic
  inefficiencies over time
• Prices do not necessarily reflect marginal costs,
  which leads to allocative inefficiencies
• Delays in resetting prices
• Risk of over-investment

• Simplicity allows to set tariffs and recover the
  costs plus a reasonable rate of return
• Adjusts prices instantaneously to ensure that a
  regulated company always earns a fair return on
  capital

Performance Based Regulation (also known as RPI -
X)
Advantages
Disadvantages

• Possibility of price distortion in an
  allocatively inefficient manner
• It involves a simple comparison of average prices
  between years, which could lead to difficulties
  if the mix of units changes
• Complexity need to use quantity forecasts and
  potentially correction factors

• The company has the flexibility to set individual
  tariffs
• Companies have an incentive to achieve productive
  efficiency
• Dynamic efficiency companies have flexibility to
  respond to new developments

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PRIVATISATION STRATEGY

• In deriving its privatisation strategy the
  Government would need to take into consideration
  numerous factors, some of which may be
  conflicting in nature
• Government objectives
• Protection of end-customers
• Timing
• Valuation
• Employment considerations
• Results of Strategic Review
• Existence of Legal, Technical, Environmental and
  Accounting Issues
• Availability of credible Regulatory framework
• Determination of Industry Structure
• Market Conditions
• Strategic Sale vs. Initial Public Offering

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APPROACH AND METHODOLOGY
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APPROACH AND METHODOLOGY TO ENSURE A SUCCESSFUL
PROCESS
We believe that a two phase approach should be
particularly suitable for Romania
Phase 1 Strategic Review and Preparation of
Preferred Privatisation Strategy
Phase 2 Implementation of the Chosen Strategy

• During Phase 1, CSFB could assist the Government
  with the following tasks
• Assess overall readiness of the industry
• Assist with hiring other advisors, as necessary
• Address identified issues
• Assist with industry restructuring
• Perform valuation analysis
• Consider sales strategy and tactics
• Propose final privatisation plan

• Following the completion of Phase 1, CSFB would
  anticipate immediately proceeding to Phase 2. Our
  approach to Phase 2 will enable us to accomplish
  the following tasks
• Preparation of Documents, including the
  Information Memorandum
• Marketing and Road Show
• Prequalification of Bidders
• Data Room Preparation / Due Diligence
• Proposal Evaluation
• Assistance in negotiation with the Selected
  Bidders

CSFB recommends that the Government adopts a
global approach to the privatisation of its
utilities by addressing as many issues as
practicable prior to privatisation, to maximise
the value of assets sold
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PRIVATISATION ALTERNATIVES
MODEL
ADVANTAGES
DISADVANTAGES
EXPERIENCES

• The Netherlands
• Australia
• Columbia
• El Salvador
• Panama
• Czech Republic
• Ukraine

Sell majority stake equity to strategic investor

• Maximise proceeds
• Relatively fast
• Gain new technology and operational best practices

• Doesnt stimulate domestic capital markets
• No opportunity for general population to
  participate

Sell minority control to strategic investor and
float the rest, Government might retain stake

• Relatively easy to implement
• Develop capital markets
• Gain new technology and operational best practices

• Government doesnt receive control premium
• Less interest without control

• Peru

No two countries followed identical privatisation
models, and Romania would need to develop a model
that best suits its needs
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PRIVATISATION ALTERNATIVES (contd)
MODEL
ADVANTAGES
EXPERIENCES
DISADVANTAGES

• Argentina
• Panama
• Chile
• Poland

Sell control to strategic investor and float the
remainder, Government might retain stake

• Gain control premium
• Gain new technology
• Develop capital markets

• Government doesnt receive full control premium

Float 30-100 of the equity(in tranches or in
full)

• Opportunity to broaden share ownership
• Easier political sell
• Develop domestic capital markets

• UK
• Spain
• Italy
• Chile
• YPF

• Does not maximise proceeds
• May be difficult in current markets
• Requires high degree of asset readiness

No two countries followed identical privatisation
models, and Romania would need to develop a model
that best suits its needs
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CASE STUDIES
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CASE STUDY UKRAINIAN DISCO PRIVATISATION

• CSFB Role
• CSFB assisted the Government in all aspects of
  the privatisation process
• Selection and appointment of other advisors
• Limited restructuring
• Future structure of the industry
• Regulatory framework
• Design and implementation of marketing strategy
• Project Environment
• Government objectives
• Raise revenue for the treasury
• Introduce market forces into the industry
• Quick implementation
• Keep electricity prices as as low as possible
• Fair and transparent process

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CASE STUDY UKRAINIAN DISCO PRIVATISATION
(contd)

• State of the companies
• No audited accounts
• No reliable technical / environmental information
  
• Substantial debt to state owned Energy market
• Inability to cut-off non payers
• Industry Structure
• Viable short term industry structure in place /
  long term objectives identified
• No regulatory framework
• Political Situation
• Government of PM Yushenco dismissed few days
  before auction
• Tender process attracted six audible bidders from
  U.S., Spain, France, Japan and Slovakia
• Sales proceeds in excess of 150 million
• First successful privatisation with participation
  of foreign buyers
• CSFB was re-mandated to privatise another 12
  discos

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CASE STUDY PRIVATISATION OF SPP

• CSFB Role
• CSFB assisted the Government in all aspects of
  the privatisation process
• Selection and appointment of other advisors
• Limited restructuring
• Future structure of the industry
• Regulatory framework
• Design and implementation of marketing strategy
• Project Environment
• Government objectives
• Maximise revenue within the context of protecting
  Slovak consumers
• Compliance with EU Gas Directive
• Quick implementation
• Fair and transparent process

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CASE STUDY PRIVATISATION OF SPP (contd)

• Industry Structure
• Long term structure dictated by EU Gas Directive
• No infrastructure to implement EU Gas Directive
  (lack of regulatory framework)
• Long-term off take contracts restricting medium
  term liberalisation
• SPP readiness
• Audited accounts (but not unbundled along areas
  of activity)
• Technical / Environmental audits available
• Substantial cross subsidies between international
  and domestic businesses
• Other factors
• Difficult privatisation environment (Post Enron
  and Sep 11)
• Upcoming elections
• Competition from Czech Republic (Transgas
  privatisation)
• Successful privatisation 2.7 billion for 49
• Company sold to a consortium of Ruhrgas / GdF /
  Gazprom
• 13 of Slovak GDP