Privatization I Theory and Stylized Facts Bernardo Bortolotti
Privatization I: Theory and Stylized Facts Bernardo Bortolotti, Dipartimento di scienze economiche Università di Torino SSST, 2012
State vs private ownership: theory § A “classic” starting point: the Fundamental Theorems of Welfare Economics § A competitive equilibrium is Pareto-efficient § Any Pareto efficient allocation can be supported by a competitive equilibrium § Under strong assumptions, when markets are competitive state ownership of firms cannot be justified on efficiency grounds 2
State vs private ownership: theory § Market failures (info, monopoly, externalities, public goods, etc. ) provide a rationale for government intervention in the economy § Such a rationale does not support state ownership: the government can provide goods and services without producing them § Neutrality theorems (Sappington and Stiglitz 1987, Shapiro and Willig 1990) 3
Sappington and Stiglitz (1987) “Fundamental” Privatization Theorem: Suppose a (benevolent) government pursues these objectives: (a) economic efficiency; (b) equity; (c) rent extraction. Then the government can design an auction scheme to meet perfectly these objectives, and public production cannot improve private production 4
Sappington and Stiglitz (1987) Proof (sketch): § Gov has a social valuation of the good (includes equity). § Production by (risk-neutral) firms. § Public procurement mechanism: the winning firm will receive a payment = to social valuation. § The most efficient firm will win the contract § If auction competitive, complete rent extraction 5
Politicians in firms: Vishny and Shleifer (1994) § Assumptions § Politicians control SOEs to achieve political objectives (excess labor, rents, etc. ) § Three players: the treasury (non strategic); the politician, the manager § Manager can be “bribed” by the politicians via subsidies from the treasury § If manager controls (i. e. SOE privatized), excess labour more costly, less transfers, more productive efficiency. 6
The incomplete contracts approach Neutrality results hinge upon availability of complete contingent long-term contracts. When contracts are incomplete, ownership matters (Williamson 1985, Grossman and Hart 1986) Suppose that surplus depends upon on some noncontractible, relation specific investment. The division of these quasi-rents will be determined by the ex post bargaining power of the parties, which in turn depends on the governance structure Privatization matter because makes the private owner the residual claimant of that surplus. 7
Sketch of Schmidt (1996) Monopolistic firm produces y of a public good, generating social benefit b(y) Costs are c(y, ) where is a state variable (high, low) which is private information of the owner/manager of the firm Manager makes a personal, unobservable nonmonetary investment, e, to reduce future costs q(e) is the probability of the low cost state 8
Sketch of Schmidt (1996) Time line 9
Sketch of Schmidt (1996) § Nationalization Suppose that contingent contracts are not feasible (wages and subsidies are fixed) The government then chooses the ex post efficient production level y* Given payments are fixed, managers sets e=0, government will offer w=0 Lack of commitment of the parts of government induces efficient production level, but productive inefficiency (costs are high because manager does not exert effort) 10
Sketch of Schmidt (1996) § Privatization The government does not know , nor the effort taken by the manager. Standard mechanism design problem (Baron and Myerson 1982): to induce the efficient level of production, the govt must provide an informational rent The optimal “regulation” scheme distorts production below the efficient level if costs are high. The manager has now incentives to invest in cost reduction to get the rent 11
Sketch of Schmidt (1996) § Key results: – Privatization entails a trade-off between allocative efficiency (production levels) and productive efficiency (investment levels) – Normative implication: privatization superior when social benefit is small – However, under these circumstances privatization is superior even when the govt is fully benevolent and rational player – Neutrality fails § Related papers: Laffont and Tirole (1991), Shapiro and Willig (1990), Bortolotti and Perotti (2006) 12
The political economy of privatization § Previous research assumed government’s preferences as exogenously given (i. e. benevolent (Schmidt 1996) vs self-interested (Shleifer and Vishny 1994)) § More recent research in political economy focused on voters preferences affecting privatization outcomes and choices § Biais and Perotti (2002), Roland Verdier (1994), Schmidt (2000) 13
Credible privatization: Perotti (1995) § Motivation: privatization can be designed to signal commitment to market oriented policies § Hyp: – two types of governments: populist and committed – As in Biais and Perotti, if SOE privatized, manager exerts effort § Stage 1: – Govt. decides % to sell – Production takes place – Govt decides to interfere (regulation, nationalization) – Profits distributed § Stage 2: – Govt. sells residual stake – Production – Interference 14
Credible privatization: Perotti (1995) § Results: when there is no uncertainty over govt. preferences, govt maximize utility with a complete immediate sale. § Obviuosly, the firm net worth (and revenues) will be lower when government is populist as interference will adversely affect manager’s incentives § Assume private information. Now populist has incentives to mimick the committed government § Results: – There exists a separating equilibrium where the committed government sells a small initial stake as a (credible) commitment device. – The populist government will sell instead its stake upfront 15
Credible privatization: Perotti (1995) § This signaling equilibrium hinges upon the (problematic) assumption that the first tranche involves the transfer of control § If a large stake is needed to relinquish control, committed government need an additional instrument to signal commitment § Underpricing of shares: selling the first tranche at discount, committed gov. signals patience to garner privatization benefits overtime § Populist government will sell entire capital at market price (UK vs France) 16
What is privatization? Definition: a transfer of ownership or voting rights in a Stateowned enterprise from the State to the private sector. The State includes the central or local government, ministries, bodies of the public administration, and companies where the central or local government acts as shareholder. The private sector comprises private individuals and economic entities with private shareholders. 17
Sketch of privatization history § 1961, Federal Republic of Germany. Adenauer (CDU) sells shares in Volkswagen and VEBA. Govt bails out § 1973, Chile. Pinochet attempts to privatize companies nationalized under Allende § 1979 -97, UK. Still the most important. SOE value added/GDP from 10% to 0%. § 1987 -88, Japan. Nippon Telephone and Telegraph (NTT) the largest share offering in history US$40 bn § 1990 s, Europe. Italy, Germany, France, Spain § 1992 -1996, Mass privatization in Russia and Czech Rep. § Mid 1990 s, CEEC and FSU § 1996 -2000, Big Global Privatization Wave 18
Facts § From 1977 to 2004, US$1. 26 trn revenues and 4, 500+ privatization deals in more than 100 countries § Global State-owned Enterprise (SOE) value added (% GDP) decrease from 9% to 6% § SOE market capitalization US$3, 310 bn § 2004: – 164 operations (€ 75 bn) globally – 53% of operations and 72% of revenues in EU – +58% in 2004 privatization revenues with respect to 2001 -2003 average – Privatization coming back strong after end of century plunge. 19
Global Privatizations, 1977 -2004 20
SOE % of GDP by stage of national development 21
Telecom Ownership, 1980 22
Telecom Ownership, 1999 23
EU 25: Country ranking by revenues, 1977 -2005 24
EU 25: Country ranking by revenues, 2005 25
Country ranking by revenues 26
EU 25: Privatization Revenues by sectors, 1977 -2005 27
Last major deals 2005 28
What is left to sell in Europe? § The central governments’ (or privatization agencies) portfolio in 123 listed companies is worth € 295 bn § 78% of this portfolio is directly held; 22% is held by financial holdings controlled by the State (Kfw, CDP, CDC, etc. ) § This portfolio is worth approximately 1/3 of total privatization revenues. Privatizing the “final tranche” becomes the issue. Will government relinquish control? § More likely, IPO wave of non-listed State-owned firms 29
European governments’ portfolio 30
European governments’ portfolio by sector 31
Top 20 most valuable stakes 32
Methods § Share issuance on public markets largely predominant throughout the 90 s: public offerings raised 73% of revenues § Bear markets and high volatility shifted government’s choice towards: – Private equity placements – Accelerated (ABO, Bought Deals, Block Trades) Transactions (AT) § If AT gain market shares, retail market will disappear. End of popular capitalism? 33
Public vs private equity markets 34
End of the retail market? 35
- Slides: 35