september 2, 2011 the russian academy of national economy and public administration under the...
TRANSCRIPT
September 2, 2011
The Russian Academy of National Economy and Public Administration
Under the President of the Russian Federation
William MegginsonProfessor & Rainbolt Chair in Finance
University of Oklahoma
Executive Director, Privatization Barometerwww.privatizationbarometer.net
Global Trends In Privatization:Lessons For Maximizing Economic Growth
Privatization Overview• Why Have Governments Embraced Privatization?• Has Privatization Worked?
– Choices In Designing Privatization Program• How Have Governments Privatized?
– Sale Choices To Meet Financial, Economic Goals• Privatization’s Impact on Global Capital Markets• Has Privatization Benefited Investors?• Summary—The Lessons Of Privatization Research
and Experience
Why Have Governments Embraced Privatization?And How Much Has Actually
Occurred?
Brief History Of Privatization• FRG’s Adenauer Government Actually First (1961) • Small British Petroleum, Other Sales (1977)• First Thatcher Government (1979-83)• The Turning Point: British Telecom (Nov 84)• The French Chirac Government (1986-88)• Privatization Spreads To Asia (NTT 1987-88)• Transition in Central, Eastern Europe (1991-1997)• Golden Age of EU Privatizations (1994-2000)• Latin America Embraces (1990s), Then Halts Privatization• Privatization Drops 2000-09, Then Bounces Back• Opportunistic EU Privatizations, As Markets Allow (2000s)• China Adopts Its Own Brand Of Privatization (Since 2002)• Emerging Markets Take the Privatization Lead (Since 2006)• GFC Nationalizations, Then Sales--Mostly US (2009-11)
Worldwide Revenues From Privatizations, 1988-2010 ($US Billion)
Source: Figure 1.2 of William L. Megginson, The Financial Economics of Privatization (Oxford University Press, 2005), Updated by author using data from Privatization Barometer.
1988
1990
1992
1994
1996
1998
2000
2002
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2006
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2010
0
50
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300Chart Title
Why Have Governments Embraced Privatization?
• Poor Economic Performance of SOEs– State Ownership Theoretically Defensible– In Practice, Often Highly Inefficient and Politicized– Chronic Under-Investment Due To PSBR
• Unending Need For SOE Subsidies – Up To 10% Of GDP In Some Countries– Pervasiveness Of Soft Budget Constraints
• Revenue Governments Can Raise From Privatization– Fiscal Impact Of Privatization Very Positive– Cannot Be Sole Reason Due To Tax Trade-Off
• Empirical Support For Private Ownership
The Impact of Privatization• Has Significantly Reduced State’s Role in OECD
– SOEs Effectively Eliminated From UK Economy– Rapidly Shrinking Role In Other OECD– SOEs Have Declined, But Not State’s Overall Role
• Transition Economies Have Been Transformed– SOE Role Cut Up To 90% In Eastern Europe– Russia Partially Privatized
• Less Change In Developing Countries Until Recently– Modest Change In Africa, Latin America Thru 1992– Much Has Changed Since 1997
• Growing Impact In China, India, Other G20 EMs
SOE Share Of GDP, By Region, 1978-97
Share of State Owned Enterprises in Total Output
0%
5%
10%
15%
20%
25%
1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
Africa
Latin America
Asia
Industrial Countries
Source: Florencio Lopez-de-Silanes, Privatization Barometer Newsletter #2 (January 2005)
Has Privatization Worked?
Has It Improved Financial And Operating Performance
Of Divested Firms?
Has Privatization Improved Firm Performance?
• 44 Studies Examine Performance Changes Using Accounting Or Real Output Data– Examine Transition, Other Economies Separately
• 12 Single-Country Or Single-Industry Studies– Britain, Argentina, Mexico, Canada, Chile– Telecommunications, Airlines
• 12 Pre- Vs Post-Privatization Studies Using SIPs– Only SIPs Generate Post-Issue Financial Reports– Severe Limitation Since Small Minority Of Sales
• 20 Empirical Studies Of Transition Economies– 12 Examine CEE; 7 Study FSU; 1 China
Three Directly-Comparable Studies Using SIPs Yield Consistent Results
• Megginson, Nash & van Randenborgh (JF 94), Boubakri & Cosset (JF 98), And D’Souza & Megginson (JF 99) Use Identical Methodology:– Compare Pre- To Post-Privatization Performance– Compare Average Values From (+1,+3) to (-3,-1)– Use Identical Empirical Proxies
• But Examine Largely Non-Overlapping Samples– BC Examine LDCs, MNR & DM Mostly OECD– Combined Have 211 Firms From 42 Countries
All Three Studies Show Significant Performance Improvements
• Profitability (NI/Sales): Increases From Average 8.6% Before To 12.6% After Privatization, With Over 67% Of Firms Improving. Significant Improvement.
• Efficiency (Real Sales Per Worker): Increases From 97% To 116% of Year 0 Level, And 81% Of Firms Improving. Significant Improvement.
• Output (Real Sales): Increases From 94% To 177% of Year 0 Levels, And 80% Of Firms Improve. Significant Improvement.
All Three Studies Show Significant Performance Improvements
• Leverage (Total Debt/Total Assets): Falls From 0.48 Before To 0.44 After Privatization, And 67% See Leverage Declines. Significant Improvement.
• Dividends (Cash Dividends/Sales): Dividends Rise From 2% To 6.5% of Sales; Over 80% Of Firms Experience Increase. Significant Improvement.
Only Differences Between Studies: Employment & Capital Spending
• Capital Investment (Cap Exp/Sales): Rises In All Three Studies, From 14% To 19% After Privatization, And Over 60% Show Increases, But DM Not Significant. Significant Improvement.
• Employment (# Employees): MNR And BC Show Increases; DM Shows Significant Decrease, Overall Average Little Change (286 Worker Increase, From 22,936). Mixed Results: But Little Evidence Of Mass Layoffs.
Designing A Privatization Program To Maximize Economic Value--Choices
• If Needed, Restructure Before Sale Or After?– Unless Compelling Antitrust Problem Or Clear
Over-Staffing, Leave R/S To Private Owners• Allow Foreign Participation? If So, How Much?
– Prohibiting Foreign Ownership Very Costly– If Vital, Many Ways To Maintain Domestic Control
• Sell All At Once Or In Tranches?– Asset Sales Generally Involve 100% Sales– Tranches Generally Required & Preferred In SIPs
Designing A Privatization Program To Maximize Economic Value--Choices
• How To Design In Good Corporate Governance?– New CEO? Select “Commercial” Board of Directors
• How To Sequence Sales?– Sell Easy Ones First; Political & Economic Benefits
• Regulate Utilities Before Or After Sale?– Effective Regulatory Regime Essential Before Sale
• Maximize Proceeds Or Maximize Odds Of Success? – Most Critical For SIPs; Can Design Terms For Asset
Sales To Achieve Economic Objectives
How Do Governments Privatize?
Through Private Sales, Public Offerings, Contracting Out
Governments Use Five Basic Methods To Privatize
• Direct (Asset) Sale: Sale Of A Company To Another Firm Or Group Of Investors For Cash.
• Share Issue Privatizations (SIPs): Public Offering of Common Stock Currently Owned By Government.
• Voucher Privatization: Vouchers Distributed To Citizens For Free (Or At Low Cost). Convertible Into SOE Shares.
• Concessions: Selling Rights to Operate Existing Assets—Mostly Infrastructure
• Public-Private Partnerships (Project Finance): Used to Build New Assets Under Contract
One Study Examines Choice Between SIPs And Asset Sales
• Megginson, Nash, Netter & Poulsen (JF 2004): Examine Choice of public (SIPs) or private (asset sales) capital market for privatizations for 2,477 sales over period 1977-2000, raising $1,189 bn.
• SIP is More Likely: (1) The larger the firm; (2) The stronger are S/H rights and legal tradition; (3) For more profitable firms; (4) The less developed are capital markets; (5) The more equal the income distribution.
• Asset Sale More Likely: (1) The more stable the government; (2) By right-wing governments; (3) The more developed the national capital market; (4) The more unequal the income distribution in the country.
Characteristics Of SIPs Versus Asset Sales
Variables SIPs Asset Sales
# Privatizations 931 1,526
# Countries 78 96
% of Capital Sold [Avg] (Median)
34.9%(25%)
74.2%(90%)
$US Offer Size, mn [Avg] (Median)
$799($105)
$290(31)
Total $US Sold, mn $743,762 $442,522
How Politicized Are Pricing And Share Allocation Terms In Early SIPs?
• Jones, Megginson, Nash & Netter (JFE 99) Test Perotti (AER 95), Biais & Perotti (AER 2001) Models– Find SIPs Significantly & Deliberately Underpriced– Governments Almost Always Choose Fixed Price Offers– Allocate Shares To Citizens, SOE Employees– Governments Almost Never Sell 100%, Rarely Sell Control– Often Have Control Restrictions (“Golden Share”) – IR Directly Related To % Capital Offered, Gini Coeff– IR Negatively Related To Government’s “Populism”– IR Not Significantly Related To Firm Size (Not AI)
Share Issue Privatization And Individual Stock Ownership
• Many Governments Try To Create “Equity Culture”– Design Offer Terms To Maximize # Individual S/Hs– Allocate Shares To Favor Citizens Over Foreigners,
Encourage Individual Ownership• Large SIPs Often Create 1 Million+ Shareholders
– France Tel 3.9 Mn, Deutsche Tel 3 Mn, Credit Lyonnais 3.4 Mn, Tel Italia 2 Mn+, Endesa 2 Mn+
– New S/Hs Often Own Shares In Only One Company• Must Create Governance System To Protects S/Hs
– Major Problem In CEE--Especially Russia– Democratic Governments Sensitive To Small S/H Losses
Key Decision Variables In Designing Privatization Sales
• Asset Sale Versus Share Issue Privatizations?– SIPs Are Transparent, Develop Local Markets
• If SIP, Sell All At Once Or In Tranches (25%, 24%)?– Tranching Shows Commitment, Raises Proceeds
• Pricing: Discount SIPs? How Much, For Whom?– Employees, Retail Buyers Often Given Discounts
• Allocation: Domestic Retail vs Domestic & Foreign Institutional Investors?– Maximize Domestic Retail, Especially if Discounted
Key Decision Variables In Designing Privatization Sales
• Are Retail Incentives Cost Effective?– Bonus Shares, Installment Plans Work, But Costly
• Use Local Or Global Investment Bank? Fee Level?– Global IB Vital If An International Tranche
• Design In Golden Shares, Control Restrictions?– Not Unless Absolute Political Imperative
• How To Avoid Overwhelming Local Stock Market?– Absorptive Capacity Probably Larger Than
Believed, But Not Infinite
Privatization’s Impact On Capital Market Development
Has Been Massive Everywhere Outside The
United States
Privatization’s Impact On Stock Market Development
• Five Largest Share Offerings In History All SIPs or Offers by Partially Privatized Companies– 30 Of 40 Largest Offerings SIPs
• 138 of 2011 FT 500 Are Privatized ($7.64 tr market cap)– SIPs 29% of Total, 46% of Non-US Market Cap
• SIPs Usually Country’s Largest Capitalization Firm– Also Most Actively Traded--Usually By Wide Margin
• Under-States True Importance Of SIPs – Play Very Important “Bellweather” Role
SIPs have raised about $1.75 trillion since 1980, Over 2/3 of Privatization’s Total; $2.5 Trillion
Most Of The Largest Share Offerings In Financial History Have Been SIPs
Date Company Amount($ Billion)
Listed NYSE
Sep 10 Petrobras $67.0 Aug 00Nov 87 Nippon Telegraph & Telephone 40.3 Nov 94Oct 88 Nippon Telegraph & Telephone 22.4 Nov 94Aug 10 Agricultural Bank of China 22.0 NoOct 06 Industrial & Commercial Bank China* 21.9 NoOct 10 AIG/AIA 20.5 YesNov 10 General Motors * 20.1 Nov 11Dec 09 Bank of America 19.3 YesNov 99 ENEL * 18.9 Nov 99Oct 98 NTT DoCoMo * 18.4 Mar 02Mar 08 Visa 17.9 Mar 08Mar 03 France Telecom 15.8 Oct 97Dec 09 Citigroup 17.0 YesOct 97 Telecom Italia 15.5 Jul 95
The Largest Emerging Market Share Offerings Have All Been SIPs
Date Company Country Amount $ millions
Sep 10 Petrobras Brazil $67,000Aug 10 Agricultural Bank of China China 22,000Oct 06 Industrial & Commercial Bank China* China 21,900Oct 10 AIG/AIA Hong Kong 20,500Jun 06 Bank of China China 11,190Jul 06 Rosneft (includ. Yukos) Russia 10,400Nov 05 China Construction Bank China 9,200Oct 09 Santander (Brazil) Brazil 9,050Nov 07 Petro China China 8,900Feb 07 Sberbank Russia 8,800Oct 07 China Shenhua Energy China 8,800May 07 Vneshtorgbank Russia 8,000Sep 07 China Construction China 7,700
Most Valuable Companies In OECD Countries Tend To Be Privatized Firms
Country Largest Firm Second Largest Third Largest Fourth Largest
Australia X
Canada X
Denmark X --
Finland X -- --
France X X X X
Israel X X -- --
Italy X X X X
Japan X
Korea X X
Mexico X --
Netherlands X X
Norway X X X --
Poland, Czech X X X
Spain X
Source: FT 500 Listing (Financial Times, June 2009) and author’s calculation
Even More Of The Most Valuable Emerging Market Firms Are Privatized
Country Largest Firm Second Largest Third Largest Fourth Largest
China X X X X
Russia X X X X
India X X X
Brazil X X
Hong Kong X X
Taiwan X X
South Africa X
Thailand X X -- --
Saudi Arabia X X X X
Singapore X X
Indonesia X -- --
Turkey X -- --
Qatar X X -- --
Kuwait, UAE X X -- --
Source: FT 500 Listing (Financial Times, June 2009) and author’s calculation
19831985
19871989
19911993
19951997
19992001
20032005
20072009
20110
10000
20000
30000
40000
50000
60000
70000
Emerging Markets
Other De-veloped
Japan
United Kingdom
United States
Sources: WorldBank, World Federation ofExchanges
World Stock Market Capitalization Growth, 1983-July 2011 ($US Bn)
Global Security Issues 1990-2010 ($Billion)
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Global debt & equity
U.S. Issuers worldwide
Pension Funds And Capital MarketsB
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Pension fund investments as % of GDP As % of stock market capitalization
Have Share Issue Privatizations Been Good
Investments?
In Most Cases, Yes
Do Privatization IPOs Out-Perform Over Long Term
• Recent Study: Choi, Lee, Megginson (FM 2010)• Collect privatization IPOs from three sources
– Privatisation International database, Appendix of Megginson (2005), World Bank database
– Stock returns, financial data from Datastream
• Final sample: 241 PIPOs from 42 countries – Total proceeds $434 billion – Average proceeds $1.80 billion; median $484 mn – UK has largest number of privatization IPOs with 27– Largest total proceeds ($73 bn), Japan’s 5 PIPOs
Results • 1-year, PIPOs have 30% vs 13% market returns
– Difference significant at 1% level
• 1-yr Buy and Hold Abnormal Returns (BHARs) significantly positive and greater than 10 percent
• Significantly positive 3-yr equal-weighted and value-weighted BHARs based on domestic market indices
• The equal-weighted 5-yr BHAR significant 44%, while value-weighted BHAR insignificant 23%
• All Regressions Show Significant Excess Returns
Cumulative Abnormal Returns (%) of PIPOs Using International Benchmarks
Benchmark Market Size Size & BM
FTSE All World Datastream World
N CAR N CAR N CAR N CAR
Panel A. Return in Local Currency
One-year 133 11.25%*** 233 14.30%*** 210 10.36% 187 109.33%***
Three-year132
10.53%* 23223.26%***
20910.34%
186 2.70%
Five-year 119 17.76%** 219 32.37%*** 196 -3.65% 173 -6.60%
Panel B. US Dollar Return
One-year 133 10.26%*** 233 13.72%*** 210 10.96%** 187 9.55%***
Three-year 132 3.56% 232 14.72%*** 209 6.48% 186 1.02%
Five-year 119 5.43% 219 19.58%*** 196 -14.01%* 173 -11.59%
Key Lessons Privatizations Of Privatization Research
Privatization Works, It Brings In Revenue, But Can Be
Executed Badly
Lessons Of Privatization Research• Sales Improve Financial & Operating Performance
– Impact On Employment Less Clear-Cut– Generally Also Yields Fiscal Bonus For Government
• But, Privatization Does Not Always “Work”– And Governments Often Try To Retain Real Control
• Investors Have Benefited From Privatization– Both Short And Long-Term Returns Are Positive
• Governments Should Sell Assets As Quickly As Possible, For Cash, To Highest Bidder– Favor SIPs, Allow Foreign Purchases When Possible
