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Monopolies Privatisation: A Realm of Risks and Rewards

Up until the 1980s, international cigarette companies were confined to competing in less than half of the world's cigarette markets. Since then, with the decline of communism and restrictive state monopolies, the competitive playing field has been dramatically improved.

Former tobacco monopoly markets which have opened up in the last 15 years include Japan, South Korea, Thailand, Taiwan, and all countries in central Europe and the Former Soviet Union. Despite the recent accelerated rate of privatisation driven essentially by the opening up of the former COMECON, there still remain a number of significant monopolies. In Asia, there are China, Korea, Taiwan, Vietnam and Thailand. In the Middle East, the cigarette production of Iran, Iraq and Lebanon has not yet been privatised. In Europe, Italy, Turkey and Bulgaria are still under state control, whereas Austria?s tobacco monopoly has been partly privatised. On the African continent, Egypt, Libya, Algeria, Tunisia, Morocco and Mali have not opened up to international investors yet.

Together, these markets represent a combined cigarette consumption of 2 billion cigarettes or 40 per cent of the world?s total consumption of cigarettes.

All of these monopolies are considering privatisation within a time frame of two to five years. Some are at advanced levels, such as Austria with approximately 60 per cent of its share capital in private hands. On the other extreme lies China's CNTC which still has declared no plans for the privatisation of its huge industrial platform.

Cigarette monopoly privatisation is a sensitive process for at heart lie the interests of many stakeholders: the government aiming to protect excise tax and duties; the local farmers looking for a stable income from regulated cultivation and pricing of tobaccos; monopoly management and employees looking for job protection; consumers who are concerned with not finding their local brands on the market in the future; and in some cases, retailers and wholesalers who have benefited from special licences and privileges ? as is still the case in Spain and in France.

Governments undertaking privatisation have therefore chosen to tread carefully on that subject. The choices are many ? floatation, sale to a strategic investor by tender process, or sale to financial investors. Strategic investors tempted to participate in cigarette monopoly privatisation need to be aware of some of the realities that come with such an investment. Generally, most participants to a privatisation know that they will find idle capacity, antiquated equipment and huge staffing levels, all of which will require significant restructuring costs. However, beyond this lie a whole range of realities that are not obvious at first sight as financial information is not always accurate and available. State monopolies often lack computerised systems, as well as internal policies and procedures, especially in human resources management. Different accounting systems with lower depreciation may occur, overstating asset values. High, and sometimes obsolete, levels of inventory are just as complicated a heritage as brand trademark rights.

Added to this complexity is the lack of publicly available information and transparency. This is where the choice of culturally attuned and experienced advisors play a significant role in ensuring a successful privatisation ? both for the seller and the buyer.

But getting it right can translate into significant benefits for all parties. The seasoned veterans know how to take into consideration the potential downsides and plan for their management in an integration plan developed well before the privatisation transaction, thereby capturing the rewards of planning and sharing the plan with all the stakeholders.

Privatisation can be a big plus for the industry. It allows for strategic cigarette companies to channel financial resources, technology and know-how towards increasing the effectiveness and efficiency of cigarette monopolies and, in the process, providing consumers with more consistent quality and newer technology. Employees benefit from advanced techniques into more satisfying work environments. Tobacco farmers learn to cultivate new crops and benefit from more current agronomy practices. And governments move from shareholders to tax collectors without the concern of having to subsidise or invest in their monopolies.

And finally the tobacco industry wins as global access opens, and best practices are channelled into the pursuit of excellence.

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