Transcript Slide 1

August 8, 2011
Global Trends In Privatization:
Lessons For Maximizing Economic Growth
William Megginson
Professor & Rainbolt Chair in Finance
University of Oklahoma
Executive Director, Privatization Barometer
www.privatizationbarometer.net
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
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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.
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 Privatized, But Not Truly Commercialized
• Much 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
25%
Share of State Owned Enterprises in Total Output
20%
Africa
15%
Asia
10%
Latin America
5%
Industrial Countries
0%
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
Source: Florencio Lopez-de-Silanes, Privatization Barometer Newsletter #2 (January 2005)
1995
1996
1997
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
34.9%
(25%)
$799
($105)
$743,762
74.2%
(90%)
$290
(31)
$442,522
% of Capital Sold [Avg]
(Median)
$US Offer Size, mn [Avg]
(Median)
Total $US Sold, mn
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
SIPs have raised about $1.75 trillion since 1980,
Over 2/3 of Privatization’s Total; $2.5 Trillion
• 4 Largest Share Offerings In History All SIPs or Offers by
Partially Privatized Companies
– 30 Of 40 Largest Offerings SIPs
• 150 of 2010 FT Global 500 Are Privatized Firms
– SIPs 23% Of Total, 49% Of Non-US Market Cap
• SIPs Usually Country’s Largest Capitalization Firm
– Also Most Actively Traded--Usually By Wide Margin
• Under-States True Importance Of SIPs
– Play Very Important “Bellweather” Role
Most Of The Largest Share Offerings
In Financial History Have Been SIPs
Date
Company
Sep 10
Nov 87
Oct 88
Aug 10
Oct 06
Oct 10
Nov 10
Dec 09
Nov 99
Oct 98
Mar 08
Mar 03
Dec 09
Oct 97
Petrobras
Nippon Telegraph & Telephone
Nippon Telegraph & Telephone
Agricultural Bank of China
Industrial & Commercial Bank China*
AIG/AIA
General Motors *
Bank of America
ENEL *
NTT DoCoMo *
Visa
France Telecom
Citigroup
Telecom Italia
Amount
($ Billion)
$67.0
40.3
22.4
22.0
21.9
20.5
20.1
19.3
18.9
18.4
17.9
15.8
17.0
15.5
Listed
NYSE
-Nov 94
Nov 94
--Yes
Yes
Yes
Nov 99
Mar 02
Mar 08
Oct 97
Yes
Jul 95
The Largest Emerging Market Share
Offerings Have All Been SIPs
Date
Company
Country
Amount $
millions
Sep 10
Aug 10
Oct 06
Oct 10
Petrobras
Agricultural Bank of China
Industrial & Commercial Bank China*
AIG/AIA
Brazil
China
China
Hong Kong
$67,000
22,000
21,900
20,500
Jun 06
Bank of China
China
11,190
Jul 06
Rosneft (includ. Yukos)
Russia
10,400
Nov 05
China Construction Bank
China
9,200
Oct 09
Santander (Brazil)
Brazil
9,050
Nov 07
Petro China
China
8,900
Feb 07
Sberbank
Russia
8,800
Oct 07
China Shenhua Energy
China
8,800
May 07
Vneshtorgbank
Russia
8,000
Sep 07
China Construction
China
7,700
Most Valuable Companies In OECD
Countries Tend To Be Privatized Firms
Country
Largest Firm
Second Largest
Third Largest
Austria
X
X
X
Australia
X
X
Britain
X
France
X
X
X
Germany
X
X
X
Italy
X
X
X
X
X
Korea
Mexico
X
Netherlands
X
Norway
X
X
Portugal
X
X
Spain
X
X
Sweden
Poland, Hungary, Czech
X
X
X
X
Source: FT 500 Listing (Financial Times, June 2009) and author’s calculation
X
Even More Of The Most Valuable Emerging
Market Firms Are Privatized
Largest
Firm
Second
Largest
Third
Largest
Fourth
Largest
China
X
X
X
X
Hong Kong
X
X
X
Russia
X
X
X
X
Taiwan
X
X
X
South Africa
X
Country
Brazil
X
X
X
India
X
X
X
Singapore
X
Saudi Arabia
X
X
X
X
Argentina
X
-
-
-
Israel
X
-
-
-
Source: FT 500 Listing (Financial Times, June 2009) and author’s calculation
World Stock Market Capitalization Growth,
1983-December 2010 ($US Bn)
Global Security Issues
1990-2010 (US$ Billion)
9000
8000
7000
6000
5000
4000
Global Equity & Debt
3000
2000
1000
0
U.S. Issuers Worldwide
Pension Funds And Capital Markets
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 valueweighted 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
FTSE All World
N
CAR
Size
Size & BM
Datastream World
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-year
132
10.53%*
232
23.26%***
209
10.34%
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
Thank You
William L. Megginson
[email protected]
http://faculty-staff.ou.edu/M/William.L.Megginson-1/