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«The Governance of Mixed-Ownership Enterprises in Latin America: Discussion Paper Acknowledgements The OECD Secretariat wishes to thank consultant ...»

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The Governance of Mixed-Ownership

Enterprises in Latin America:

Discussion Paper


The OECD Secretariat wishes to thank consultant Richard Frederick for his preparation of this draft

issues paper for the OECD/CAF Latin American SOE Network’s October 2012 meeting in Lima. It does

not necessarily reflect the views of the OECD nor its member countries and is intended for the purposes of

discussion and to prompt further reflection and research on these issues. It has been developed under the supervision of Senior Policy Analyst Daniel Blume of the OECD Corporate Affairs Division. It is intended to finalize this report and make it available to the public after taking into account the Network’s discussion and any written comments received by 31 October, 2012.

Please address any questions or comments to Daniel.Blume@oecd.org and RichardFrederickDC84@yahoo.com.



Introduction and background

The promise of mixed ownership

The challenges of mixed ownership

The hydrocarbon sector

Directions for sound governance

Issues for discussion


Introduction and background 1. This is a background paper for the meeting of the Latin American SOE Network of October 11It was developed for the session on governance issues arising from the mixed ownership of state-owned enterprises (SOEs). Its purpose is to examine the particularities of the governance of SOEs with mixed ownership structures.

2. In 2012, the OECD conducted a survey of members of the Latin American SOE Network regarding their governance practices. Respondents to the survey included: Argentina; Brazil; Chile;

Colombia; Ecuador; Mexico; and Peru. The survey responses allow the division of SOEs into categories based upon whether they are wholly owned by the state, partially owned or listed. Accordingly, 34% of SOEs are wholly owned while 66%1 have mixed ownership. Among those with mixed ownership, approximately 7% are listed.

3. The data suggests that the challenges related to the governance of mixed ownership SOEs in the Latin American context are broadly relevant. It also shows that there are two distinct forms of mixed ownership: 1) listed SOEs that have institutional and retail investors; and 2) SOEs that have large or strategic shareholders. The governance issues that affect these two groups tend to be distinct. The first group are usually passive investors with little impact on governance and limited recourse, while the second group usually has a greater ability to influence the governance of the SOE and defend its shareholder rights.

Table. Ownership structure of SOEs in some of the largest Latin American Economies

–  –  –

4. This breakdown represents ownership structures in a simplified form. In reality, SOEs have a range of ownership structures that make categorization difficult. For example, in 2006, Ecopetrol was authorized to carry out an IPO on the Colombian Stock Exchange for 10% of its common stock. At the The data does not include Mexico for which the breakdown between partially owned and wholly owned SOEs was not available.

time of its IPO, the subscription of Ecopetrol shares went 62% to individual shareholders, 37% to pension funds with the remainder going to corporations.2 It is thus partially owned and listed.

5. On the other hand, in Peru, Electro Peru is a listed SOE with 100% state ownership. The state (FONAFE) holds 22% of shares while the remaining 78% is held by FCR, the state-owned pension scheme. Presumably, FONAFE could pursue more policy-orientated objectives while the FCR could potentially take a more shareholder-driven approach. To complicate the matter, FONAFE retains 100% of the voting rights. Thus, ownership structures are quite varied and each case poses different governance challenges.

6. Though the data might seem to suggest that the relatively low number of listed SOEs means that their governance is of lesser concern, this ignores the large impact that listed SOEs have on national stock exchanges. For example, in Brazil SOEs currently account for approximately 25% of total market capitalization on the BM&F BOVESPA exchange. Petrobras alone makes up 17% while three companies (Petrobras along with Banco de Brasil and Electrobras) make up 21%. In Colombia only three SOEs are listed. However, these three (Ecopetrol, ISAGEN and ISA) constitute 15% of the National Stock Market and 70% of the total value of SOEs.3

7. Listed SOEs are often the most valuable companies in the stock markets of both developed and developing countries (Megginson and Netter, 2001). Evidence suggests that SOE issues promote the development of financial markets. The importance of listed SOEs and their governance is, thus, not to be underestimated. In addition, SOE governance can be expected to have a profound impact on investor perceptions of markets and significantly influence their development.

The promise of mixed ownership

Mixed ownership of SOEs tends to be more widespread globally than one might think.4 The 8.

explanation may lie in that mixed ownership has distinct advantages from a government perspective.

Mixed ownership allows the state to achieve efficiency gains from privatization, and raise needed revenues while maintaining control over the SOE (Roland). In addition, partial privatizations do not carry the same political costs as full scale sales. They allow the state to do a gradual implementation of reform and reduce both the economic and political risks of a wholesale divestiture.

9. The evidence shows that the benefits of mixed ownership are not just political. Mixed ownership, where the government retains majority ownership and management control, has been shown to lead to an improvement in the operating performance of SOEs.5 With the influence of new owners, profitability, sustainability and a greater client orientation often move to the forefront of considerations.

10. Mixed ownership under the right conditions may in fact be an optimal ownership structure from an overall welfare perspective since it mitigates the disadvantages of public ownership (inefficiencies, nonFrancisco Reyes & Asociados (2008), The Oil & Gas Industry in Colombia and the Ecopetrol Partial Privatization, Presentation at the Dallas Bar Association.

OECD (2012), Ownership Oversight and Board Practices for Latin American State-Owned Enterprises.

Roland G., Introduction to Privatization: Successes and Failures, Working Paper Series, Initiative for Policy Dialogue, Columbia University.

The evidence on the impact of partial privatization is less clear than for full privatization. It is strongest when new owners are strategic investors though there are also studies that find improvements in performance after exchange listings and sales to passive portfolio investors. See: World Bank, PPIAF (2009), How to Improve the Performance of State-owned Infrastructure Service Providers: Evidence from a Global Study; Gupta (2002), Partial Privatization and Firm Performance: Evidence from India, WDI Working Paper no. 426.; Asian Development Bank (2009) Finding Balance: Making State-owned Enterprises Work in Fiji, Samoa and Tonga; and Bouri, Nankbogo, Frederick (2010).

economic decision making, lack of incentives) and the disadvantages of private ownership (strong incentives to grow profit and reduce costs at expense of labour and environment).6 11. But, one should be wary of sweeping generalizations. Mixed ownership appears to have beneficial effects by enhancing the monitoring and functioning of SOEs. But it may also keep alive inefficient forms of government intervention.7 12. It is expected to lead to improvements in firm performance when new owners (whether strategic or through listing) monitor and discipline (Holmstrom and Tirole, 1993). On the other hand there may not be any performance gains if the government exercises inappropriate control. In particular undue interference to achieve political or policy objectives can hamper the economic performance of SOEs (Shleifer and Vishny, 1997).

13. State-ownership and intervention is usually defended because of the need to pursue strategic policy goals that cannot be accomplished under private ownership. However, a distinction should be made between legitimate direction by the state in pursuit of policy goals and undue or inappropriate interference.

Legitimate intervention in the pursuit of policy goals is handled through appropriate governance arrangements.

Intervention is inappropriate when it is in pursuit of political objectives and/or when the state’s 14.

intervention is unpredictable, unfair, or non-transparent. If, when shares are sold to outside investors, the state is clear that it will be pursuing strategic or public policy goals and has set a framework for this, shareholders will build this into their risk/return assessment of their investment. On the other hand, unpredictable or politicized interventions and opaque decision making will likely lead to loss of investor confidence, and eventually damage to the reputation of the state and the markets.

15. How well the mixed-ownership SOE performs will, thus, be determined largely by the governance practices of the state and how the state exercises its governance rights.

The challenges of mixed ownership 16. Wholly-owned SOEs typically present less of a governance risk to the state because the state is able to control the SOE as it sees fit. On the other hand, a straightforward full sale of the SOE to an outside investor or a full flotation disconnects the state from the operations of the company and poses limited risk to investors. In contrast, mixed ownership leaves room for a wide range of behaviours.8 17. Mixed ownership poses risks both for outside shareholders as well as the state. For the state, the principal risk is a loss of control that can hinder its achievement of social and political goals. The typical response of the state is to strengthen its influence by direct or indirect intervention. For the investor, there is the risk that the state acts to the detriment of the economic interests of the shareholder. Retail investors have few ways to mitigate such risks, though strategic investors may take advantage of information asymmetries to gain an advantage in negotiations with the state. These risks are the opposite sides of the same coin. They represent the sometimes conflicting interests of public and private owners.

Schmitz, P.W. (2000), Partial Privatization and Incomplete Contracts: The Proper Scope of Government Reconsidered, Finanz Archiv, Vol. 57, 2000, pp. 394-411, and Rupayan P. and Ritika J. (2012), Mixed duopoly, cross-ownership and partial privatization, Journal of Economics, September 2012, Volume 107, Issue 1, pp 45-70.

Roland G., Introduction to Privatization: Successes and Failures, Working Paper Series, Initiative for Policy Dialogue, Columbia University.

Chong and Lopez-de Silanes (2003).

Examples of conflicts between the state’s policy interests and the interests of private owners can 18.

be: 1) investment in projects that the state deems of strategic importance, versus investment in economically viable projects; 2) provision of products or services with social outcomes versus provision of profitable services; 3) pricing at socially acceptable levels versus pricing at economic levels; 4) dividend payments that respond to the state’s fiscal requirements versus the SOEs financing and investment needs;

5) changes in the capital structure of the SOE to provide greater control and decision making to the state versus the expectation of investors to maintain control rights proportional to their investment; and 6) related party transactions that serve the interest of the state versus serving the economic interests of the SOE.

19. These examples illustrate the classic conflict and tradeoff between social and business goals. In addition there are political economy issues. Direct intervention into SOEs is not just used to achieve legitimate social and policy outcomes. It is not infrequent for intervention to be motivated for political reasons, personal interests and sometimes even rent seeking. Such interventions are not generally in either the SOE’s or the public interest but are often excused by making reference to social outcomes.

20. Mixed ownership is, thus, an insufficient condition to promote better performance. A number of other conditions need to exist. The critical factor is how the government exercises its influence on the SOE.

To the extent that the state continues to exert direct and/or informal decision-making control, or indirect control via regulators, and does so in an opaque fashion, the governance, decision making, and incentive structures do not change from the long-ingrained practices that may have contributed to poor performance in the past.

21. On the other hand, to the extent that there are no clear alternatives to intervention and alternative means for the state to achieve its legitimate policy objectives, there will be continued pressure to intervene.

In a worst case scenario, shareholders can face the risk of expropriation. Thus, the problem of mixed ownership is not just a question of enforcing and ensuring respect for shareholder rights but also for finding effective alternative tools for the state to achieve its legitimate goals.

The hydrocarbon sector

22. The hydrocarbon sector is cited here as an example to illustrate some of the problems that arise when the interests of the state and shareholders conflict. Over recent years, Latin America has witnessed the growing interest of outside investors in its oil and gas industries, which has resulted in an increase in asset purchases, joint ventures and equity acquisitions. This increase in interest is linked to a long-term increase in global energy prices, as well as the discovery of new oil and gas reserves in the region. 9 The hydrocarbon sector is interesting to observe because energy is of strategic interest, because the sums of money are large, and because the sector is highly visible.

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