• Opinion
  • October 29, 2018
  • 6 minutes
  • 1

To privatise or not to privatise, that is the question

Opinion: To hold or sell a state asset must be a rational decision, not one based on ideology

state owned enterprises

This opinion piece was written by Jean Paulo Castro e Silva, Brazil’s former director for data governance and an MPA candidate at Lee Kuan Yew School of Public Policy. 

If you already have a strong opinion for or against the privatisation of state owned enterprises (SOEs) and are simply looking to confirm what you already believe, I hope to disappoint you. What I am going to show here is something fundamental: to hold or sell a state asset must be a rational decision, not one based on ideology.

This is a recommendation to governments from the OECD, part of their official Guidelines on Corporate Governance of State-Owned Enterprises, based on best practice country examples.

The guidelines present recommendations on both how governments must manage their enterprises (what they call the state’s ownership function) and on how managers must direct each enterprise, that is, corporate governance in the strict sense.

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SOEs’ corporate governance has two layers: one outside the companies, linked to the state’s ownership, and another inside the companies, performed by the board representing public and private shareholders. It is good practice that these two layers are separated, with clear roles and responsibilities. The government, in its role as owner, is responsible for defining an overall policy of state ownership, and should not interfere in daily running of the company.

State ownership policy needs to reduce risk of ideologic bias in decisions

Such state ownership policy needs to reduce risk of ideologic bias in decisions over holding or selling state assets. It should demonstrate to the public the outcomes that the state expects from the companies it controls or is a relevant shareholder in (internationally, a minority share of the government in a company is enough to it be considered an SOE). When expected outcomes have been achieved, or if the SOE is not performing as planned, it is reasonable to transfer the company to the private sector or liquidate it.

Many developed and developing nations have clear state ownership policies. Singapore’s government controls or has minority shares in about 1,000 companies throughout the world through the holding Temasek. Its ownership policy is oriented to financial outcomes: assets must generate long-term risk-adjusted financial goals, otherwise they are sold or liquidated.

In China, there are thousands of SOEs with governance inspired by Singapore’s model. The government has said it plans to support more mixed public-private ownership to attract private investment and to enhance SOEs’ efficiency through exposure to market competition. One way to do that is through internationalisation; multinational Chinese SOEs are one of the most active players in recent privatisations in Brazil.

In India, the government has published its decision to maintain at least 51% of stocks in strategic SOEs and up to 26% ownership of non-strategic ones or totally privatise them. Parliament must approve the divestment plan for each company, followed by a valuation and final sale decision made by a specialised high-level committee.

Many developed and developing nations have clear state ownership policies

In Turkey, the government implemented a similar process to India: a high-level council approves proposals for initial public offerings, which are conducted by a government body specialised in SOE privatisation. Sale of government shares only takes place if the company is commercially viable and market conditions for a public offer are favourable.

Colombia’s government has established a global strategy of state-owned commercial assets, declaring which goals each SOE must achieve. They include contributing to strategic sectors of the country’s economy and development; solving market failures; and supplying public services in cases where the private market is not sustainable. Based on this strategy, the government makes decisions regarding sales, public offerings, acquisitions, mergers, or liquidation.

In Brazil, the 2016 SOE law brought some innovation to SOE corporate governance, moving towards the separation between politics and enterprise management — although the law is still far behind the OECD’s recommendations. The law makes progress around improvement of internal corporate governance of SOEs, but has practically nothing to say on the role of the state as an owner of enterprises.

Until Brazil has a well-defined state ownership policy, which transparently declares the reasons to maintain, privatise or liquidate an SOE, hundreds of billions of Brazilian Reals of public assets risk having their futures decided by ideology rather than rational principles.

To find out more, take a look at my MPP paper on Opportunities for Institutional Improvement in the Governance of Brazilian SOEs (in Portuguese). — Jean Paulo Castro e Silva

(Picture credit: Pexels)


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