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Potential of the state to control privatized firms

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Abstract

The privatization strategy in many transition economies involved the creation of a special government agency that administered state property during privatization programs as well as after the privatization was declared complete. The National Property Fund (NPF) was the agency in the Czech Republic. In many firms the state kept property long after the privatization was completed. We analyze the control potential of the state exercised through the NPF via the control rights associated with capital stakes in firms along with special voting rights provided by law. Based on a complete data set on assets as well as the means of control in privatized firms we conclude that for most of the 1994–2005 period, the state control potential was extensive and certainly larger than has been found by earlier research.

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Notes

  1. The National Property Fund was established on 24 May 1991 in order to implement privatization decisions and to temporarily control shares that were owned by the state before being privatized. The NPF was established based on the Act of the Czech National Council No. 171/1991. The NPF terminated its operations on 31 December 2005 based on Act No. 178/2005 from 28 April 2005.

  2. The agency costs result from the managerial pursuit of private benefits at the expense of the firm. The agency costs were likely present in the early phase of the transition due to the weak monitoring of managers by the state as owner combined with the absence of external legal constraints.

  3. The method of the privatization of each state-owned firm was decided on the basis of an officially accepted privatization project. According to the law, all state-owned enterprises were selected for either the first or the second privatization wave, or they were temporarily exempted. Each selected firm had to submit an official privatization proposal that was usually crafted by the firm’s management under the tutelage (and responsibility) of its sectoral ministry. Any domestic or foreign corporate body or individual was allowed to present a competing project that was to be considered on an equal footing with the official one.

  4. A general outline of a mass privatization using vouchers emerged in 1988. Lewandowski (1997) describes: “Mass privatization was a unique response to the post-communist challenge. The idea of distributing vouchers to promote equitable popular participation in privatization was elaborated by market-oriented advisers to the Solidarity movement in Gdansk, Poland, in mid-1988. Vouchers were intended to make up for insufficient supply of capital; as a special type of investment currency, they would be allocated to all citizens and tradable for shares of privatized companies. The concept was presented at a conference in November 1988—when communists were still in power—in response to a solicitation for proposals on how to transform Polish economy.” A description of the method was published by Lewandowski and Szomburg (1990). The voucher scheme was creatively adopted in several European transition countries including the Czech Republic.

  5. For the first wave in the Slovak Republic as well, since only in 1993 was Czechoslovakia split into two independent nations: the Czech and Slovak Republics.

  6. The regulation of PIFs evolved gradually through Decree no. 383/1991, its Amendment No. 62/1992, and Act No. 248/1992. The most important clauses restricted each privatization fund from investing more than 10% of the points acquired in the voucher scheme in a single company and obtaining in exchange more than 20% of the shares in any company. Privatization funds established by a single founder were allowed to accumulate up to 40% of shares in a given company, but this cap was later reduced to 20%. Many privatization funds circumvented the cap through mergers. The Act also prohibited PIFs founded by financial institutions from purchasing the shares of other financial institutions to prevent excessive concentration of financial capital (for details see Kotrba and Svejnar 1994).

  7. Despite the massive scale of the voucher privatization, by 1998 there still remained a substantial number of companies where the state was involved. Altogether 1849 companies of a book value of 367.5 billion CZK entered both waves of voucher privatization. In 1998 the state was still involved in 369 companies with an overall book value of more than 440 billion CZK. The book value of the state share in these companies amounted to almost 177 billion CZK (Kočenda 1999).

  8. For example buying back the privatized stake in the national air carrier (Czech Airlines).

  9. The state using a golden share as an instrument of control is not isolated to emerging markets. Bel and Trillas (2005) show that Telefonica, the former telecommunications public monopoly in Spain, was totally transferred to the private sector in 1997, after the state sold its last stake in the company. However, a political mechanism of control was in place after privatization, in particular via the golden share. Some deals that would have been positive for shareholders were not completed, and some of the deals that were completed had a negative effect on shareholder value. The operation of various managerial disciplining devices in Telefonica was not optimal. No strategic private block-holder exercised true authority in the company in the period under study. The government’s golden share made takeovers impossible and takeover threats ineffective.

  10. See Grundmann and Möslein (2003) for an account of issues related to instruments with special rights in European markets.

  11. The available data sources as well as the scope of this paper do not allow us to quantify the size of the overestimation.

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Acknowledgements

We are grateful to Lubomír Mlčoch and an anonymous referee for helpful comments. We thank Brano Saxa, Lenka Drnáková and Juraj Stančík for research assistance. The financial support of GACR Grant No. 402/06/1293 and FP-6 Grant No. 2005-028647 is gratefully acknowledged. The usual disclaimer applies.

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Authors and Affiliations

  1. CERGE-EI, Charles University and the Academy of Sciences, Politickych veznu 7, P.O. Box 882, 111 21, Prague, Czech Republic

    Jan Hanousek & Evžen Kočenda

  2. The William Davidson Institute, Ann Arbor, MI, USA

    Jan Hanousek & Evžen Kočenda

  3. CEPR, London, UK

    Jan Hanousek & Evžen Kočenda

  4. Euro Area Business Cycle Network, London, UK

    Evžen Kočenda

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  1. Jan Hanousek
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  2. Evžen Kočenda
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Correspondence to Evžen Kočenda.

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Hanousek, J., Kočenda, E. Potential of the state to control privatized firms. Econ Change Restruct 41, 167–186 (2008). https://doi.org/10.1007/s10644-008-9047-3

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