LISTING STATE-OWNED ENTERPRISES IN EMERGING AND DEVELOPING ECONOMIES Lessons learned from 30 years of success and failure CONTENTS Acknowledgements 2 Acronyms 4 Executive summary 5 Introduction 9 Background 10 ACKNOWLEDGEMENTS Taking stock — SOE listing characteristics in EMDEs 12 SOE listing‘s impact on capital markets development 24 SOE listing‘s impact on economic development 44 The report was produced under the direct oversight of Anderson Caputo Silva, Manager of the Long-Term Finance Unit of the FCI Global Practice, World Bank. When to list? — Preconditions of success and drivers of impact 57 The report was peer reviewed by Ana Carvajal (Lead Financial Sector Specialist, WB), Alexander Berg Conclusion 71 (Senior Financial Sector Specialist, WB), Thomas Chalumeau (Principal Investment Officer, IFC), and Hannes Takacs (Head of Mongolia, EBRD and Former Associate Director for Local Capital Markets Bibliography 73 Development). The authors are grateful to all of them for their insights and constructive comments, which have helped enrich this report. Annex 76 The authors would like to sincerely thank the eight ASEA executive committee members for their continuous support and guidance. Their help has allowed this report to draw on a rich set of experiences across the African continent, adding depth and insight. The team of authors would also like to thank Xavier Reille, Country Manager for Morocco, IFC, whose guidance and support have been crucial to the report’s finalization. Lastly, the team would like to thank the Luxembourg Ministry of Finance for its generous partnership and continued support for the J-CAP initiative. Without this help, J-CAP’s knowledge activities would not exist as they do today. © The World Bank | Oliver Wyman | The Goverment of the Grand Duchy of Luxembourg | ASEA (African Stock Exchange Association) 2 © The World Bank | Oliver Wyman | The Goverment of the Grand Duchy of Luxembourg | ASEA (African Stock Exchange Association) 3 ACRONYMS EXECUTIVE SUMMARY ADR ................... American depositary receipt Well-developed local capital markets play a mixed experiences. Some have successfully crucial role in the financing of sustainable used SOE listings to kick-start the development ASEA ................. Africa Securities Exchange Association economic growth and the maintenance of of their local exchanges (e.g., Poland, Brazil, financial stability. Singapore). Others have not only struggled BCR ................... Banca Comercială Română to list their companies but also saw no effect Local capital markets can improve the or even a negative effect on the development BMCE ................ Banque Marocaine du Commerce Extérieur availability of long-term financing, allowing of their local capital markets, with a resulting companies to better manage interest rates stagnation in market growth after SOE listings BNDES .............. Brazilian Development Bank and maturity risks that are associated with (e.g., WAEMU, Kenya) or the migration of long-term investments, such as for equipment, local company listings and capital toward COVID-19 ......... SARS-CoV-2 Pandemic of 2019 machinery, land, and buildings. In addition, international markets (e.g., Argentina). local capital markets provide access to DL ..................... Dual-listing/Cross-listing financing in local currency that allows local With that in mind, with what confidence issuers and investors to better manage inflation can we recommend SOE listings as a divestment EMDE ................ Emerging and developing economies and exchange rate risks. In short, local capital method to promote capital markets development markets are an essential tool for companies to in EMDEs? GDR .................. Global depository receipt strengthen their balance sheets and weather financial and economic crises. In this report, we aim to shed light on this IPO .................... Initial public offering question by investigating EMDE’s experience The benefits of local capital markets are with SOE listings over the past 30 years. SOE ................... State-owned enterprise well-known among emerging and developing We combine a thorough literature review economies (EMDEs). Over the past 20 years, with a case study analysis of 14 frontier and SPO ................... Secondary public offering EMDE governments have engaged in large emerging markets, including interviews reform programs to support the development with key stakeholders from the public and YPF .................... Yacimientos Petrolíferos Fiscales of their local capital markets. Yet, many private sector. In particular, we aim to answer governments struggle to see their markets three questions: SAMIR ............... Société Anonyme Marocaine de l’Industrie du Raffinage flourish. The number of listed companies remains stagnant and the participation of 1. What has been the impact of SOE listings on WAEMU ............. West African Economic and Monetary Union domestic and foreign investors limited beyond local capital markets development in EMDEs? the sovereign debt markets. 2. What have been the pre-conditions for One approach that is re-gaining popularity is successful SOE listings? the listing of state-owned enterprises (SOEs). In the empirical literature, SOE listings have 3. Once listed, what have been the drivers often been cited as the cause behind the rise for creating a positive impact on capital of international capital markets.1 Indeed, markets development? according to some calculations, former SOEs account for about 13–22 percent of global Because SOE listings have consequences market capitalization2 — suggesting a positive beyond capital markets development, we also correlation. However, advanced economies aim to summarize the impact of SOE listings on account for the predominant share of SOE other key economic variables — in particular listings, even though SOEs operating in firm performance, the quality of public service EMDEs account for an estimated US$ 45 trillion delivery, employment, wealth distribution and in assets. 3 fiscal revenue. However, since this report is primarily focused on capital markets, we do not Many EMDEs that have tried to replicate the claim to provide the same in-depth discussion as success story of advanced economies have had for our three focus questions. Our sole objective 1 See Guriev and Megginson (2006); Subrahmanyam and Titman (1999); McLindon (1996); Kleiman and Morrissey (1994). 2 www.economist.com/business/2014/11/20/state-capitalism-in-the-dock 3 blogs.imf.org/2020/05/07/state-owned-enterprises-in-the-time-of-covid-19 © The World Bank | Oliver Wyman | The Goverment of the Grand Duchy of Luxembourg | ASEA (African Stock Exchange Association) 4 © The World Bank | Oliver Wyman | The Goverment of the Grand Duchy of Luxembourg | ASEA (African Stock Exchange Association) 5 is to provide policymakers with sufficient We define SOE listings as impactful if their direct • A large domestic institutional investor markets development without necessarily information to make an educated decision and indirect effects on market capitalization, base. A large domestic institutional investor transferring their controlling interest. In fact, on whether or not SOE listings are a suitable listings, liquidity and investor base development base increases the absorption capacity of the many EMDE governments that have successfully solution for their respective country. are positive over the short, medium and long local capital markets. It also creates a certain listed a large number of their SOEs have used term. We find that the preconditions for a level of stability and increases the possibility listings as a tool to gradually reform their role Lastly, we would like to point out that we do not successful listing have indeed been achieved by of demonstration effects, whereby the SOE in the economy, transitioning from “the state as aim to answer the question whether or not a many EMDEs and a good number of countries listing encourages other private companies an active entrepreneur” to one of a “strategic government should divest their SOEs. Instead, have been able to list their SOEs successfully. But to list. investor.” As such, listings have allowed we seek to identify if listings are an appropriate many SOE listings fall short of their expectations governments to hold minority or majority stakes divestment method to achieve particular with regard to the developmental impact, as Beyond their positive impact on capital in companies they believed required continued objectives once a divestment decision has the drivers of impact are numerous and often markets development, SOE listings can government support (which should not be been made. require a significant investment in time and positively affect economic development, mistaken for an invitation of state interference). resources. In the following, we highlight some especially fiscal revenue generation and Governments that choose to act as strategic Our conclusions are the following: of the most important factors for successful and wealth distribution: investors should prepare to assume their role impactful listings: as professional shareholders, e.g., appointing SOE listings can provide a significant boost • Fiscal revenue generation. SOE listings some of the board directors through the general to capital markets development over the • Strong institutional competence. provide governments with substantial assembly with the mandate to represent the short term. However, only under certain Government institutions need to have additional revenue. Across our case study interests of the government. The earlier a circumstances does the positive initial impact the necessary credibility that provides countries, governments have capitalized government defines and communicates its contribute to long-term developmental investors with sufficient confidence. At the well on their SOE listings, raising, on average, future role in divested companies to the market, effects. Due to their large size and value, minimum, investors want their property US$ 8 billion (median US$ 5 billion) per the better. This will most likely also be reflected rights well-protected and be shielded from country over the past 30 years. For most SOE listings can significantly boost market in better pricing of the SOE shares. corruption. Thus, the entire process has governments, this has been a welcome capitalization and broaden the investor base, to be transparent and should make use capital injection to pay down government especially among retail and foreign investors. However, this is not to say that government- of competitive procurement and pricing Some of the largest SOE listings across our case debt. Others have used their proceeds for ownership should be preferred over methods as much as possible. study countries allowed local equity markets productive purposes, including financing privatization. In many cases where SOE listings to improve market capitalization by up to social services or critical infrastructure have been embedded in a privatization effort, • A well-functioning capital markets 170 percent. SOE listings have also attracted a projects. In addition to the sale proceeds, larger benefits could be achieved — such as infrastructure. As mentioned above, in the broad shareholder base, sometimes over one governments have benefited from sizable improved firm performance, which may be few cases where SOE listings had an adverse million investors, many of them first-time retail dividend payments — provided they continue difficult to achieve under continued government effect on capital markets development, investors. At the same time SOE listings have the market infrastructure was too weak to to hold a portion of shares. Lastly, some control. However, in many EMDEs where public provided governments with a great opportunity provide foreign and domestic investors with governments succeeded in reducing their opposition to privatization has been growing, to attract foreign investors. For example, sufficient confidence that market processes expenditure on financial support previously SOE listings could serve as a “second-best” SOEs constitute about 60 percent of the MSCI could function effectively and protect provided to the listed SOE — sometimes up solution to privatization, realizing many, albeit emerging market index in energy and about investor interest. to one percent of GDP. However, for such not all the benefits. 40 percent in the financial sector. But beyond savings to materialize, SOE listings usually the direct effects, SOE listings seem to encourage • Large and profitable SOEs. Listing have to be preceded by structural reforms Compared to other divestment methods, SOE private companies to list only in rare cases. companies at a stock exchange is an that address fundamental inefficiencies in listings have a relatively weak impact on firm A positive impact on private company listings expensive process and only economical the respective sectors. performance unless combined with other can often only be achieved where SOE listing for larger companies. Capital markets restructuring measures. The impact of SOE programs are integrated into a larger capital require scale to function properly. Selling • Wealth distribution. SOE listings can be listings on firm performance depends on various markets reform plan. For example, measures that small SOEs or only small minority stakes a vital tool to redistribute some of the factors, including the sector, the ownership create a positive investor experience and develop of larger SOEs is likely to create liquidity wealth created by a country’s economy. structure, the choice of management and the overall market confidence need to be undertaken problems for the SOE shares. Different Different from other divestment methods, strength of market institutions. For example, to make the initial impact on the market’s from privatizations through trade sales, SOE listings encourage the participation of across our case study countries, we find that investor base sustainable. Lastly, we find very SOEs will need to demonstrate a track retail investors. Our analysis finds that SOE SOE listings have improved EBIT margins in record of profitability before they can be listings can significantly broaden the retail few examples where SOE listings have created a the telecommunications, transport, oil and gas listed. Thus, before SOEs can be listed, it investor base, in some cases attracting negative impact on capital markets development. and financial sectors but produced only mixed will be important to help them achieve a In all these cases, the root cause was a weak more than one million individual investors. or even negative results in the power sector. commercial viability, including through capital markets infrastructure. Thus, we conclude In most cases, retail investors have earned In addition, we find that SOE listings’ impact sector reforms. that the downside risks of SOE listings appears a significant market-adjusted return, easing is highly dependent on who controls an SOE to be small. some of their opposition against SOE post-listing. Efficiency improvements tend to be • Listing according to market conditions. divestment and privatization. largest where governments have transferred To achieve an appropriate offer price Not every EMDE may be ready to list SOEs and reduce the risk of adverse effects on control to the private sector. But because SOE successfully and reap the benefits for capital markets, governments should aim As shown above, SOE listings have many listings rarely lead to a change in control, this capital markets development. Our analysis to list their SOEs during times of economic benefits over whole-state ownership that effect can only be achieved if combined with distinguishes between the conditions to list SOEs expansion and take their markets’ capacity do not require governments to relinquish other divestment methods. Hence, governments successfully and the drivers necessary to create a to absorb investments in new shares control. Governments can raise capital, that successfully improved an SOE’s performance positive impact on capital markets development. into consideration. democratize ownership and support capital have either restructured them on their own © The World Bank | Oliver Wyman | The Goverment of the Grand Duchy of Luxembourg | ASEA (African Stock Exchange Association) 6 © The World Bank | Oliver Wyman | The Goverment of the Grand Duchy of Luxembourg | ASEA (African Stock Exchange Association) 7 INTRODUCTION account (e.g., Argentina’s YPF) or sold their other labor-intensive sectors. This may not be controlling interest to a strategic investor pre- or unintended, as a restructuring’s objective is to post-listing — good examples include WAEMU’s reduce inefficiencies (including overstaffing), Sonatel, Romania’s BCR and Morocco’s BMCE. but governments should ensure that alternative The choice of management has also shown to employment opportunities are available and be crucial to a firm’s performance. Across most that those job cuts have no direct effect on SOEs that have seen a significant improvement poverty. Where those conditions cannot be In this report, we investigate SOE listings as In this report, we aim to shed light on this in firm performance, the change has often been guaranteed, SOE listings as a policy to increase a solution to promote local capital markets question by investigating EMDE’s experience with led by a visionary leader, such as José Estenssoro firm performance and develop local capital development. According to some estimates, SOE listings over the past 30 years. We combine at YPF Argentina and Javier Gutiérrez at Ecopetrol markets may be hard to justify. SOEs in EMDEs exceed US$ 45 trillion in value, a thorough literature review with a case study Colombia. Market institutions can also have a equivalent to half of global GDP.4 Thus, SOE analysis of 14 frontier and emerging markets, positive impact on firm performance especially Against the backdrop of our findings, many listings could offer governments an enormous including interviews with key stakeholders by establishing and enforcing corporate EMDEs may face a dilemma: Even though their opportunity to kick-start the development from the public and private sector. In particular, governance and reporting standards. However, countries stand to benefit from SOE listings, of their local capital markets while achieving we aim to answer the following three questions: such effects are likely to be weak where market many have yet to develop the conditions other divestment objectives, such as harnessing regulators lack the appropriate enforcement under which SOE listings can be successful the SOE’s value and raising fiscal revenue. 1. What has been the impact of SOE listings on powers and where the domestic institutional and have a positive impact on local capital local capital markets development in EMDEs? investor base is small or follows a passive markets and the broader economy. In the empirical literature, SOE listings investment strategy. have often been cited as the reason behind 2. What have been the pre-conditions to This does not mean that SOE listings should not the rise of international capital markets. 5 successfully list a SOE? Like any divestment method, SOE listings be pursued by EMDEs where those conditions And indeed, the current capital markets are no panacea. We find that the access remain underdeveloped. Instead, efforts will landscape includes a significant share of 3. Once listed, what have been the drivers and quality of public services provided by SOEs have to be undertaken to strengthen the (former) SOEs. According to some calculations, for creating a positive impact on capital are less a function of ownership than of sector enabling environment. Priority should be given SOEs account for about 13 –22 percent of markets development? governance. Although SOE listings can improve a to strengthening government institutions to global market capitalization — suggesting firm’s efficiency — especially if fully privatized — reduce political risk, sector frameworks that a positive correlation.6 Because listings have significant effects on their impact on public service delivery depends put industries, especially in the infrastructure the broader economy and potentially harness the on a government’s ability to resolve any sector, on a commercially viable path, and However, looking behind the numbers, it seems value of SOEs in a different way, this report also fundamental sector inefficiencies that existed capital markets infrastructures to ensure strong that most SOE listings have taken place in attempts to evaluate the impact of SOE listings on prior to listing, including the underpricing of corporate governance and low transaction advanced economies. Although developed other key economic variables — in particular firm services and the lack of competition. costs. Independent from SOE listings, these economies were able to boost their local capital performance, the quality of public service delivery, reforms will form a crucial part of any country’s markets through SOE listings, it is unclear employment, wealth distribution and fiscal Lastly, the benefits of SOE listings should economic development. There are no quick whether the same is true for EMDEs. revenue. Since this report is primarily focused on always be viewed within the broader fixes. But once the conditions are strengthened, capital markets, we do not aim to provide the socio-economic context. Although listings SOE listings can offer an attractive divestment Many EMDEs that have tried to replicate the same in-depth discussion of those aspects as for have no direct impact on employment, method with a potential positive long-term success story of advanced economies have had our three focus questions. Our sole objective is to many SOEs require restructuring due to impact on local capital markets and therefore mixed experiences. Some have successfully used provide policymakers with sufficient information which job cuts are likely to occur. The risk should be considered as a viable option for SOE listings to kick-start the development of their to make an educated decision on whether or is exceptionally high in manufacturing and divesting SOEs. local exchanges (e.g., Poland, Brazil, Singapore). not SOE listings are a suitable solution for their But others have seen no or even negative effects respective country. on local capital markets development — resulting in the migration of local companies and capital We would also like to emphasize that we do toward international markets (e.g., Argentina). not aim to answer whether or not a government should divest of their SOEs. Instead, we seek With this in mind, with what confidence can to identify whether or not listings are an we recommend SOE listings as a divestment appropriate divestment method to achieve method that promotes capital markets specific objectives once the decision to divest development in EMDEs? of an SOE has been made. 4 www.blogs.imf.org/2020/05/07/state-owned-enterprises-in-the-time-of-covid-19/ 5 See Guriev and Megginson (2006); Subrahmanyam and Titman (1999); McLindon (1996); Kleiman and Morrissey (1994). 6 www.economist.com/business/2014/11/20/state-capitalism-in-the-dock © The World Bank | Oliver Wyman | The Goverment of the Grand Duchy of Luxembourg | ASEA (African Stock Exchange Association) 8 © The World Bank | Oliver Wyman | The Goverment of the Grand Duchy of Luxembourg | ASEA (African Stock Exchange Association) 9 BACKGROUND Exhibit 1: Divestment typology Method Form Description Merits Demerits Trade sale/ Private • Negotiated sale: • Strategic investor • No revenue auction sale Sell a portion of • Suitable for SMEs maximization SOE to a preferred • No need to private bidder • Introduces management adhere to stringent Definitions and services, public wealth, employment and • Block trades: changes and listing requirements fiscal revenue. Offering tranches technology infusion • Lack of process In the following, we define the term divestment of shares in integrity already listed SOEs • Less restructuring as any government sale of incorporated assets. required • Not suitable for very privately to groups of investors • Cheaper and faster large companies Accordingly, the sale of minority interests Methodology than IPO • Not suitable if will be considered a divestment. We use the concerns about term privatization in its traditional sense, To inform policymakers and business leaders competition describing a government transfer of the in their future SOE listing decisions, we have Trade sale Auctioning off a • Best price • Potential discounts majority ownership and control of an SOE into combined a review of the empirical literature with auctions portion or all to especially if not the hands of the private sector.7 Divestments a case study analysis of 14 frontier and emerging highest bidder restructured and privatizations can take many forms, markets. These countries have been chosen based including listings at the stock exchange, on their SOE listing activity over the past 30 years, Share Initial public Offering a tranche • Good governance • Dispersed trade sales to private firms, or management their difference in economic size and geographic offerings offering (IPO) of shares on the and management shareholding stock exchange(s) practices • Expensive to execute buyouts (see Exhibit 1). As per our definition, location (see annex). The analysis consists of a we exclude any sale of physical assets by combination of desk research, statistical data • Potential for good • Pricing and Secondary Offering additional SOEs and any transfer of activities to the analysis and interview with selected counterparts, performance valuation tricky public offering tranches of SOE private sector through instruments such as including stock exchanges, government (SPO) shares following IPO • Raises capital for • No choice in concessions and public-private partnerships. authorities, regulators and SOEs. Where relevant, seller and company strategic investor Accelerated Placing tranches we have enriched our case study analysis with book building of shares of already • Less expensive • Prices come at SOE listings are a flexible divestment additional examples from other EMDEs, to make (a form of SPO) listed SOEs with and speedier a discount to method through which the government our report as illustrative as possible. institutional investors public offering can either continue to control a listed SOE or divest the controlling stake as part of a But before we invite our readers to dive into the Convertible Disposing of additional • Credibility enhancing • Postpone transfer bonds tranches of listed SOEs for privatisation of ownership privatization process. analysis and conclusions, we would like to note that through the issuing of programme • Investor decides these results are indicative. SOE listings, like most convertible bonds In this report, we will examine SOE listings privatization methods, are often accompanied • Adaptable to on convertibility market realities • Not commonly used in EMDEs according to their success and impact. by other far-reaching reform efforts (e.g., sector We define an SOE listing as successful when reform, liberalization of financial markets, etc.) Privatization Issuing additional • Need to shore up i) the listing has been oversubscribed, ii) the and as a result their effects may be difficult to by SOE stock to dilute capital base shares were successfully settled and iii) trade isolate. Although we have used various methods ownership share with sufficient liquidity, i.e., a narrow bid-ask to isolate SOE listing effects — e.g., screening Management/ Trade sale Shares sold to legal • Suitable for smaller • Conflicting spread in line with local markets. Further, we the methodology of the empirical literature for employee entities controlled compaies objectives consider a listing to be impactful if its direct their robustness and conducting trend analyses buy-out by staff and/or • Garners support • Corporate and indirect effects on market capitalization, for our case study countries — an endogeneity management for privatization governance listings, liquidity, and investor base bias is likely to persist to some degree. Moreover, program weaknesses development are positive over the short, SOE listings are biased towards the largest and medium and long term. At the same time, most valuable companies in a government’s SOE • Aligns incentives • Forgo value while an SOE listing can have a significant portfolio. Thus, the impact, especially on capital impact on capital markets development, other markets development and firm performance, Source: Drawing on OECD (2003), OECD (2009) and Author aspects have to be considered, including firm could be overstated compared to other performance, the delivery of public goods privatization methods. 7 www.dictionary.cambridge.org/dictionary/english/privatization © The World Bank | Oliver Wyman | The Goverment of the Grand Duchy of Luxembourg | ASEA (African Stock Exchange Association) 10 © The World Bank | Oliver Wyman | The Goverment of the Grand Duchy of Luxembourg | ASEA (African Stock Exchange Association) 11 TAKING STOCK — SOE LISTING CHARACTERISTICS IN EMDES Geography Although Latin America and Central and Eastern Europe were among the early movers, Latin America was one of the early movers, most SOE listings took place in East Asia dominating issuance during the first half of the (see Exhibit 3). Notably, China stands out. 1990s — foremost targeting foreign investors. Over 25 years, the Chinese government SOE listings became a popular divestment Since the financial crisis in 2007–2008, SOE Chile’s equity offering of Telefonos at the divested numerous SOEs, nearly all via the method during the 1980s and 1990s, pioneered listings in EMDEs have decreased following an New York stock exchange for US$ 98 million was stock exchange. Many of those SOEs, however, by the market reforms of Margaret Thatcher in overall downward trend in public offerings at the first listing of a Latin American SOE. In 1991, remain under government control. the United Kingdom. equity markets globally. Argentina was the first country to sell Global Depository Receipts (GDRs) by offering shares of SOE listings have been more limited in Africa, Many EMDEs followed the example of advanced Overall, it is fair to say that the uptake of SOE Telefonica de Argentina with a nominal value of the Middle East and South Asia — except for economies and started to list their SOEs in the listings in EMDEs has remained low compared US$ 364 million. The sale of 30 percent of Telecom India. Despite coining “the peoplization of beginning of the 1990s (see Exhibit 2). During to advanced economies. Especially during the Argentina was followed by another issue of GDRs SOEs” as a central government policy in the this phase, governments usually sold the majority financial crisis, EMDEs have seen relatively few and an issue of American Depositary Receipts 1960s, India did not start to divest from its SOEs share and control of an SOE, aiming to privatize SOE listings. (ADRs) for US$ 270.3 million. In May 1991, Mexico before 2009. During the period of 2009-2013, the company as part of a broader effort to develop carried out the largest single issue of ADRs more than 200 SOEs were listed, mostly on the the private sector. However, with the start of In the following section, we will analyze some of when the government privatized the remaining Bombay Stock Exchange (today known as BSE). the 2000s and the rise of SOE listings in Asia the main characteristics of SOE listings in EMDEs 15 percent of Telmex for a total of US$ 2.4 billion. But similar to China, the government retained (mainly China and India), minority divestments to better understand past-use cases and the Argentina launched its largest privatization with the majority share and control in almost all listed have become more popular. By selling a minority opportunities and challenges policy-makers may the sale of its national petroleum company, YPF, SOEs — in many, direct state ownership remains stake to the public, governments could reap the face when listing their SOEs in the future. The in the mid 1990s for a total of US$ 3.04 billion, greater than 76 percent.9 In Sub-Saharan benefits associated with listing without giving analysis covers the past 30 years of SOE listings 75 percent of which came from international Africa, only a small number of SOEs were listed, up their controlling stake. Thus, in the face across 14 different EMDEs with significant SOE offerings (see Box 1).8 accounting for only about four percent of all of growing skepticism against privatization, listing activities. privatizations undertaken in the region — minority divestments via listings have become A large number of SOE listings have also occurred instead, most SOEs were sold privately through a “second-best” solution for large privatizations during the transition period in Central and trade sales. Nevertheless, there have been a few through listings. Eastern Europe. Different from Latin America’s interesting examples, such as the cross-listing SOE listings, they included a widespread free of Kenya Airways, which significantly increased or subsidized allocation of shares to employees market capitalization in Kenya and Uganda. Exhibit 2: SOE listings in EMDEs and the wider population. But because these Number of listings mass privatizations took place under unique Overall, China and India remain the two top circumstances and yield limited lessons that are emerging economies by total revenue raised 150 transferable tor other regions, we have excluded through SOE listings. them from the subsequent analysis. 100 Exhibit 3: Volume of SOE listings in EMDEs (US$ billions) 50 30,000 1990 1995 2000 2005 2010 2015 20,000 Lower-income Volume economies (US$ billions) High-income economies 10,000 150 100 1990 1995 2000 2005 2010 2015 50 Asia Latin America Africa 1990 1995 2000 2005 2010 2015 Source: Dealogic Lower-income economies High-income economies Source: Dealogic 8 Sader (1995). 9 OECD (2016). © The World Bank | Oliver Wyman | The Goverment of the Grand Duchy of Luxembourg | ASEA (African Stock Exchange Association) 12 © The World Bank | Oliver Wyman | The Goverment of the Grand Duchy of Luxembourg | ASEA (African Stock Exchange Association) 13 Exhibit 5: Share price performance by sector (5-year average post-listing) Sector infrastructure sector, transportation (mainly airlines) and telecommunications have seen the Average SOE SOE listings dominate in the infrastructure second and third largest number of SOE listings. Sector # SOEs share price/index (percent) sector — especially in energy, transportation and telecommunications (see Exhibit 4). Across EMDEs have also actively privatized and listed Financial Services 8 99 our case study countries, the energy sector their financial institutions — the second largest Oil and Gas 4 116 has seen the largest number of SOE listings, sector after energy. Especially in Asia, many with 22 percent of all SOE listings during 1990 governments sold off their government-owned Telecommunications 5 129 and 2019. Especially in Latin America, many banks after the Asian financial crisis in 1997–98, Utility and Energy 12 84 governments have listed their energy SOEs at when the cost of bailing out government-owned local and international exchanges. Within the banks became too high. Source: Datastream, Dealogic Exhibit 4: Number of SOE listings in by sector Latin America The large share of infrastructure and financial largest IPOs have been SOE listings, such as the sector companies suggests that SOE listings listing of Saudi Aramco, and Enel S.p.A., which 6 are biased towards sectors with large, are among the 10 largest IPOs worldwide.11 This capital-intensive companies. Further, their does not come as a surprise. SOEs often play shares seem to perform better in industries a vital role in their home country’s economy, with exposure to market competition or predominantly operating in strategic and public- 3 technology disruption. A comparison service oriented sectors, such as infrastructure suggests that SOEs in the telecommunication development and financial services. Globally, they and oil and gas sectors perform better than account for about 20 percent of investments, the respective country indexes. In contrast, five percent of employment, and up to 40 percent 1995 2000 2005 2010 2015 SOEs from the financial sector perform of domestic output.12 Taking into account that a on par and power utilities under-perform, large proportion of an SOE is sold in subsequent Asia (excluding China) mainly when market competition is limited SPOs and not during the IPO, SOE listings also (see Exhibit 5). tend to be larger than those sold via other 20 divestment methods (e.g., trade sales).13 For example our estimates show that in Poland, revenues from listings have been on average 10 Size more than 2.3 times larger than from private sales, despite a significantly larger number of SOE listings tend to be very large, private sales. Governments usually sell only their both in relative and absolute terms. As largest SOEs via stock exchanges because the 1995 2000 2005 2010 2015 Exhibit 6 shows, SOE listings are significantly costs associated with restructuring and listing larger relative to private company listings for any can be very high. Listings require lawyers and given country. This holds true for all countries investment banks to be consulted, prospectuses Africa across our case study except Argentina, Egypt to be prepared, and marketing campaigns to be and Nigeria.10 But also in absolute terms, the organized. Such efforts are often only warranted 8 empirical literature notes that some of the world’s in the case of large enterprises. 4 1995 2000 2005 2010 2015 Finance Oil & Gas Telecommunications Transportation Utility & Energy Other 10 The smaller average size of SOE listings in Egypt and Nigeria is partially driven by the very large nature of their privatization programs, which aimed to indigenize their public companies by selling a large proportion of their SOEs to the public, including small and micro-SOEs made up of mills, farms, and ranches. Source: Dealogic 11 www.statista.com/statistics/269343/worlds-largest-ipos/ 12 www.ifc.org/wps/wcm/connect/topics_ext_content/ifc_external_corporate_site/ifc+cg/topics/state-owned+enterprises 13 Megginson (2005). © The World Bank | Oliver Wyman | The Goverment of the Grand Duchy of Luxembourg | ASEA (African Stock Exchange Association) 14 © The World Bank | Oliver Wyman | The Goverment of the Grand Duchy of Luxembourg | ASEA (African Stock Exchange Association) 15 Lastly, the largest SOEs of an economy are often example, Argentina’s restructuring and cross-listed at international exchanges, aiming to subsequent IPO of Yacimientos Petrolíferos Timing A few selected SOE listings have occurred attract foreign investors (see Exhibit 6). Fiscales (YPF) is an example of a government during an economic contraction, either that successfully restructured an SOE on its Like private companies, SOE listings tend to because of strategic reasons or due to own account (see Box 1). In contrast, Kenya’s follow the economic cycle. Listings are most unavoidable circumstances, such as an IMF Safaricom and Mexico’s Aeromexico are two actively pursued when the economy is growing program. Among our case study countries, Profitability successful examples of a restructuring process (see Exhibit 7). Governments seek to achieve Poland has seen a handful of SOE listings outsourced to strategic investors through a a fair valuation for their companies — partly to during times of economic turmoil. One example Most SOEs are profitable before listing. Unlike pre-sale shareholder arrangement. In the case avoid any criticism for “selling off the country’s is the listing in November 2018 of ENEA, other divestment methods, SOEs need to show of Mexico, Aeromexico’s shares were sold to ‘crown jewel’ too cheaply.” Such prices are Poland’s third-biggest power producer. To a track record of profitability before they can be Banamex, a bank owned by Citigroup before best achieved during a bull market when manage the uncertainty over the investors’ listed, or at least provide strong evidence for being listed in 2011; in Kenya, the controlling investors’ risk appetite is most pronounced. If a interest, the government had set a minimum their potential to grow their net earnings within stake in Safaricom was sold to Vodafone, which government aims to target foreign investors, price and pro-actively sought strategic a short time. Besides, profitability is one of the restructured the company before listing it in the global economy’s health and the current investors from the energy sector. The listing criteria for many investors to participate. 2002. Whether a government is restructuring investor sentiment will likely also influence the was successful with Vattenfall AB buying an unprofitable SOE on its own or through a timing of the listing. 19 percent of the SOE. Also, depending on the exchange, profitability strategic investor depends on multiple factors, can be one of the listing requirements. For including the government’s institutional example, in South Africa and Nigeria, any capacity, the strategic importance of the SOE Exhibit 7: SOE listings by economic cycle company aiming to list will have to have been and the sector’s competitiveness and potential profitable for at least three years. for technology disruption. South Africa Nigeria To fulfill the profitability criteria, many Based on these conditions, a listing probably governments decide to restructure their motivates a government to restructure an SOE Egypt unprofitable SOEs pre-listing. Governments but does not represent its primary mechanism — WAEMU* have chosen different ways to do so. For with the exception of China (see Box 7). Colombia Brazil Exhibit 6: Average offering size (US$ billion) Turkey 2.0 Romania Morocco 1.5 South Korea Argentina 1.0 Singapore 0.6 Poland 0.5 0.4 0.4 5 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 0.1 0.1 0.1 SOE listings numbers Expansion Recession Brazil Egypt Poland Turkey Morocco Taiwan Nigeria Argentina Romania Colombia Singapore South Africa South Korea * The focus is on Cote d’Ivoire Source: Dealogic, World Bank WDI Private company SOE DL private company DL SOE Source: Dealogic © The World Bank | Oliver Wyman | The Goverment of the Grand Duchy of Luxembourg | ASEA (African Stock Exchange Association) 16 © The World Bank | Oliver Wyman | The Goverment of the Grand Duchy of Luxembourg | ASEA (African Stock Exchange Association) 17 Share offering Lastly, selling an SOE slowly allows Box 1. SOE Restructuring — the case and a re-organization of its human resources. market participants to strengthen their of Yacimientos Petrolíferos Fiscales YPF cut its workforce from 52,000 to 10,600 Due to their large size relative to a country’s skills and learn from their experience, (YPF), Argentina employees. Surprisingly, labor unions did not economy, SOEs are usually sold incrementally thereby contributing to the development strongly oppose the restructuring because i) through multiple SPOs following the initial of the local financial services industry. The restructuring and subsequent listing of YPF, the President of Argentina and the government offering — however, the IPO often remains Argentina’s national oil company, is an example of publicly supported the restructuring, and ii) the largest sale (see Exhibit 8 and 9). This Technically, most SOE IPOs are secondary a successful transformation from an unprofitable, YPF offered generous severance packages. YPF approach allows investors to absorb the offerings, i.e., the government sells existing poorly managed SOE into one of the world’s also offered early retirement with full benefits issuance and gives market forces sufficient shares, without additional company shares largest, profitable oil companies at the time. for those eligible, training and educational time to determine the company’s value. As a being issued. courses plus one year’s salary for those result, offer prices for SPOs tend to be higher YPF’s transformation was part of a long but interested in learning a new marketable skill, than those of SOE IPOs. well-managed process. In 1989, the government or an entrepreneurial option with a guaranteed enacted the State Reform Laws, which built contract from YPF (so-called emprendimientos). the backbone of a broad deregulation process The entire restructuring process lasted about Exhibit 8: Share of primary share offerings versus secondary share offerings of various industries, including the oil sector. three years and involved at its peak some The deregulations broke up YPF’s monopoly 200 international experts simultaneously. Case country SOE listing value by offering type (percent of all listings) power and introduced market competition 0 25 50 75 100 to all aspects of the industry, except for the The final step was the IPO. First, an international Argentina ownership of Argentina’s crude oil resources. accounting firm carried out an independent WAEMU* Deregulations created the conditions for the firm valuation, intending to set a price on the Nigeria government’s success in restructuring YPF by shares. Then, a roadshow through most of the Poland creating the necessary market pressures that prospective markets was organized, aiming to Colombia forced YPF on a commercial path. raise investor interest. Finally, on July 1, 1993, 45 percent of YPF was sold at the New York, Morocco After the deregulations were completed, the London, and Buenos Aires stock exchanges, Singapore Argentine government developed a strategic achieving a US$ 19 per share price. The sale Romania privatization plan, with an international reached a value of US$ 3 billion in what was said Egypt consulting firm’s help. A three-year, three-step to be the year’s largest global IPO. The listing South Africa approach was identified and implemented: was almost three-times oversubscribed. Turkey Brazil 1. Eliminating non-strategic, Overall, YPF’s listing generated US$ 5.1 billion South Korea unprofitable businesses in cash and incurred US$ 13.5 million in Taiwan costs. The upstream strategic business 2. Restructuring the organization unit’s joint ventures, concessions, and sales brought US$ 1.8 billion, and the downstream 3. Offering the company to investors in national strategic business unit’s direct sale brought Case country SOE listing value by offering type (percent of total listing value) and foreign markets through an initial US$ 272 million. In addition, the new YPF 0 25 50 75 100 public offering paid US$ 109 million in taxes in 1993 and US$ 99 million in 1994. Dividends rose from Argentina To realize those steps, the government hired US$ 239 million in 1992 to US$ 587 million WAEMU* a visionary leader, José Estenssoro, a former in 1994.I Nigeria Hughes Tool Company executive in Latin Colombia America and an Argentine oil entrepreneur. 1 Post-listing, YPF’s productivity continued to Egypt The first step of the privatization plan began rise. Reserves expanded by 50 percent while Romania in 1990 when YPF sold all non-strategic and production increased from 109 million barrels Poland non-profitable assets — including obsolete in 1993 to 190 million in 1998 — the highest Singapore refineries, tanker fleets, schools, hospitals, and amount of oil ever produced by YPF. In 1999, Morocco airplanes. Those assets were auctioned and sold YPF was sold to Repsol, a Spanish oil company, Turkey for a total sum of US$ 2.1 billion. The second and ultimately renationalized in 2012 as part of step of the plan began in 1991 and involved a policy-shift toward greater state control over Brazil the company’s organizational downsizing the economy. South Africa Taiwan South Korea I Grosse and Yanes (1998). SPO IPO * The focus is on Cote d’Ivoire Source: Dealogic © The World Bank | Oliver Wyman | The Goverment of the Grand Duchy of Luxembourg | ASEA (African Stock Exchange Association) 18 © The World Bank | Oliver Wyman | The Goverment of the Grand Duchy of Luxembourg | ASEA (African Stock Exchange Association) 19 Exhibit 9: Share offerings over time for selected SOEs Company Year of IPO Firm ownership and control various SOEs, such as Vale (iron) and Aracruz Celulose (pulp and paper). Singapore Telecommunications Ltd 1993 In EMDEs, SOE listings tend to create complex ownership structures. A small group of investors Many fully privatized SOEs remain under the Bank Handlowy SA 1997 often exercises control over the company but control of a small group of investors, typically usually under scrutiny of a diverse group of private corporations or strategic individual KGHM Polska Miedz SA 1997 minority shareholders. Most listed SOEs are investors. From a global perspective, fully- Bank Pekao 1998 either controlled by the government, a small dispersed ownership has become a rare group of private corporations or strategic phenomenon. In only one percent of the Orbis SA 1998 investors. In the case of private ownership, largest listed companies worldwide do the the control over the company is usually decided three largest shareholders hold less than ten TPSA 1998 through a trade sale pre- or post-listing, not percent of the equity capital.16 And there are through the listing itself. The listing process many good reasons for this. For example, Chartered Semiconductor Manufacturing Ltd 1999 focuses on attracting minority shareholders. where SOEs require restructuring, it has proven beneficial for governments to sell Korea Telecom Corp 1999 Although many SOE listings during the 1980s the controlling share to a strategic investor Central Reinsurance Corp 2000 and 1990s were part of a wider privatization pre-listing. Furthermore, Schleifer and Vishny effort — especially in Latin America — we have (1997) observed that in the absence of a strong Chunghwa Telecom Co Ltd 2000 noticed a shift toward minority sales since the minority shareholder protection law, investors 2000s. According to an OECD study, eight percent seek to own a large share of the privatized Petrobras 2000 of the world’s 10,000 largest listed companies SOE’s equity to protect their interests and have government ownership that exceeds 50 exercise control. This is also confirmed by Woori Finance Holdings Co Ltd 2002 percent of the equity capital — with an even Mohammad Omran (2009) who found that in Maroc Telecom 2004 higher share in EMDEs, especially in Asia, Middle Egypt, six years post-listing, a significantly East and North Africa and emerging economies larger proportion of SOE shares were held PKO BP 2004 of Europe.14 Looking at the largest listings across with a small group of domestic and foreign our case study countries, we have found similar institutional investors compared to the IPO Grupa LOTOS SA 2005 results. For example, Romania’s Transgaz and year. Hence, even where SOE listings initially Transelectrica continue to be controlled by the attract a large retail investor base, ownership Transelectrica SA 2006 government. In Turkey, a large proportion of is likely to concentrate over time unless a SOEs (e.g., Halkbank) remain majority owned by market has established its credibility as a well- Transgaz SA 2007 the Turkish Sovereign Wealth Fund. functioning and attractive savings mechanism. Turkiye Halk Bank AS - Halkbank 2007 As a result, free float tends to be lower in But even in those instances where SOE EMDEs than in advanced economies. Azoty Tarnow 2008 listings lead to or are part of privatizations, governments often retain a minority share, In more developed capital markets, institutional Bogdanka SA 2009 insert control restrictions in the firm’s charters investors have evolved as a third dominant or establish golden share structures that shareholder class. For example in South Africa, PGE Polska Grupa Energetyczna SA 2009 provide it with powerful veto rights. Poland and Brazil, institutional investors hold PZU SA 2010 25 to 34 percent of total market capitalization,17 According to the OECD, governments remain and according to our interviews, they also TAURON Polska Energia SA 2010 powerful minority shareholders in 11 percent are the main investors in SOE listings. This of the largest listed companies, especially in development has been driven by several SNGN Romgaz SA 2013 strategic sectors, such as energy and telecom.15 factors. One reason has been the transition of Across our case study countries, Brazil is a good pension systems from pay-as-you-go to funded IRB-Brasil Resseguros SA 2017 example where the government continues to pension plans, leading to growth of both keep, or has regained, a minority ownership in privately and publicly managed pension funds. -2 0 2 4 6 8 10 12 14 16 Years from IPO Sales value (US$ millions) <100 1000 2000 3000 4000 5000 14 Ownership and control can be either directly held by the central or local governments or indirectly via public financial Type of listing IPO SPO intermediaries, such as sovereign wealth funds. 15 OECD (2019). Source: Dealogic 16 OECD (2019). 17 OECD (2019). © The World Bank | Oliver Wyman | The Goverment of the Grand Duchy of Luxembourg | ASEA (African Stock Exchange Association) 20 © The World Bank | Oliver Wyman | The Goverment of the Grand Duchy of Luxembourg | ASEA (African Stock Exchange Association) 21 Lastly, listed SOEs’ ownership is further large proportion of SOE listings are absorbed investor tranches are often placed through those cases are the minority. One example is complicated by the growth of cross-border by employees, retail and foreign investors. a tender offer or book building process to Aeromexico. The proceeds of its listing were investments. Foreign investors have become Governments often use share allocations to maximize proceeds. used to finance the company’s expansion plans. an important stakeholder in SOE listings. For employees and retail investors as a means On the other hand, once listed, several SOEs example in Brazil, Poland and South Africa, to gain political support for a planned Our analysis shows that the price discovery start issuing new shares, often selling them to foreign investors hold 30-40 percent of total privatization process. For example, in process has been fair across our case study existing shareholders through rights offerings market capitalization18 and are similarly large WAEMU, the government allowed employees countries. The changes in share price on the — one good example is BMCE in Morocco. investors in SOE listings — although foreign to buy 10 percent of the 27 percent stake listing day, which is a good indicator whether a Capital raised by new shares is usually used for investor participation may be limited by in Sonatel at a highly discounted price, price discovery process has been successful, has capital investments. regulation. In less developed equity markets, aiming to reduce workers’ resistance against been small and slightly positive (see Exhibit 10). foreign investors also play an important role. divestment and ensure continued voter In most cases, however, governments used Although small in absolute terms, foreign support. Similarly, in Kenya the government Auctions have usually been oversubscribed, the proceeds from SOE listings to buy down investors may be the largest institutional offered employees and retail investors partially as a result of the underpricing. government debt. For example in Brazil during investor in an SOE listing. In addition, they shares at a significant discount to create the 1990s and early 2000s more than 160 SOEs play an important role as strategic investors, political support for the divestment policies were divested and their proceeds helped to either in the form of a private corporate or a of the government. Due to the large size of reduce public debt by eight percent of GDP. 20 strategic individual. Good examples are Kenya’s SOE listings, foreign investors often play Proceeds Safaricom, WAEMU’s Sonatel, or Morocco’s Maroc an important role as well. Foreign investors In other countries, such as WAEMU, Singapore Telecom. Independent of the market’s stage of tend to use the opportunity of a large SOE Unlike private company IPOs, SOE IPOs and Turkey, the proceeds have been reinvested development, foreign investors tend to increase IPO to get a first-time exposure to the are mostly secondary offerings, where the into the economy, including large infrastructure their participation over time provided they have country’s equity market. proceeds are commonly used to support the projects. In the example of WAEMU, the had a positive experience. For example, in Egypt, government’s budget. We find some anecdotal proceeds from the Sonatel listing were used foreign investors’ mean ownership in listed • In larger, more developed markets, evidence where public offerings have also been to support social services, especially in health SOEs increased from 5.8 percent in the IPO year domestic institutional investors, such as used to raise capital for the listed SOE, but and education. to 11.7 percent in the sixth year post IPO.19 pension funds, insurance companies and mutual funds, become more relevant and often absorb a large proportion of the listing (e.g., in Poland or more recent SOE Share allocation IPOs in Romania). Foreign investors are Exhibit 10: Changes in share prices (percent change from IPO price) present but often do not represent more SOE IPOs are usually sold in tranches, with than 10-20 percent of the IPO value. Case study pre-determined allocations for employees, retail country 1 Day 1 Week 1 Month 6 Months 1 Year # listings investors and foreign investors. To attract foreign investors, various countries have chosen to either cross-list their SOEs Argentina 1 0 0 10 48 9 Studying over 630 IPOs and seasonal offerings, (see Exhibit 6) or issue GDRs/ADRs. Brazil 6 11 14 16 26 14 Megginson and Netter (2001) report that about Colombia 36 33 40 59 38 3 60 percent of the studied IPOs had included a foreign investor tranche, which represented a WAEMU* n/a 8 12 6 -20 3 median of about 11 percent of the IPO and an Price formation Egypt 17 12 9 15 19 4 even larger share of the secondary offerings. Tranches for employees had been included Governments across EMDEs commonly use Morocco 18 16 40 54 71 7 in about 91 percent of all studied listings. fixed prices as their preferred method to sell Nigeria 5 5 78 597 409 1 Preferential tranches for retail investors SOEs via the stock exchange. This means that existed in about 16 percent of all offerings. the price for an SOE is usually identified through Poland 6 6 8 8 17 84 external auditors whose recommendation is Romania 15 17 18 25 16 8 Despite the fact that data on the investor base of then used to set a fixed price several weeks in Singapore 7 10 37 44 14 10 SOE listings across our case study countries has advance of the offering date. These fixed prices been difficult to collect, the cases for which data tend to undervalue the SOE to create follow- South Africa 2 0 3 12 75 3 was available suggest a change in the investor on demand. South Korea 8 8 22 32 29 26 base as capital markets develop: In instances where SOE listings comprise Taiwan 16 15 17 13 12 27 • In frontier markets where the domestic several tranches, the retail portion is often a Turkey 2 3 -7 -1 -14 11 institutional investor base remains small, a fixed price and the institutional and foreign * The focus is on Cote d’Ivoire Source: Dealogic 18 www.oecd.org/corporate/Owners-of-the-Worlds-Listed-Companies.pdf 19 Omran (2009). 20 Carvalho (2001). © The World Bank | Oliver Wyman | The Goverment of the Grand Duchy of Luxembourg | ASEA (African Stock Exchange Association) 22 © The World Bank | Oliver Wyman | The Goverment of the Grand Duchy of Luxembourg | ASEA (African Stock Exchange Association) 23 SOE LISTING’S IMPACT ON Exhibit 11: Market cap growth in year of largest listing (in percent) Case study country CAPITAL MARKETS DEVELOPMENT Singapore South Korea 171 167 Argentina 137 Egypt 98 In the empirical literature, SOE listings have empirical literature nor our case study analysis been celebrated as the driver behind the could fully remove. Especially the selection bias — Colombia 93 rise of global capital markets because they i.e., that only the largest and most valuable SOEs Morocco 79 presented the first large public offerings in are listed — may influence the results towards a almost all non-US equity markets. 21 Although more positive picture. Romania 75 the empirical literature’s claim may be valid Turkey 60 on a global level, the picture becomes more complicated at a country level. Nigeria 48 Market size South Africa 29 As our analysis shows, SOE listings can indeed kick-start the development of local capital We measure the size of an equity market Poland 26 markets, especially during the early and through two variables: market capitalization and WAEMU* 20 intermediate phase of a market’s development. the number of listings. Both indicators include Taiwan 18 This is not surprising because many SOEs listed SOEs and listed private companies. In are among the largest and most valuable the following, we distinguish between direct Brazil 16 corporations in a given country. They provide an and indirect effects, whereby a direct effect important source of new listings and boost an describes the impact of SOE listings on market * The focus is on Cote d’Ivoire exchange’s market capitalization. Unfortunately, capitalization and total number of listings. Source: WFE — World Federation of Exchanges demonstration and spillover effects into the Indirect effects explain an impact of SOE listings broader market seem to materialize only in on market capitalization and total number some instances, when certain enablers are in of listings through their effect on private Exhibit 12: SOE listing impact on market capitalization growth (in percent) place, such as a comprehensive government companies’ willingness or ability to list. SOE listing program, a relatively large domestic 1990-1995 45 15 institutional investor base, and a certain size SOE listings can have a significant direct 1995-2000 24 -5 of the economy. Hence, SOE listings can play a impact on market capitalization, especially catalytic role in capital markets development. during the early phase of an equity market’s 2000-2005 12 -7 At the same time, they are not a silver bullet. development. Because of their large size relative 2005-2009 -0.1 6 Multiple factors are at play for capital markets to an economy, SOE listings can boost a stock to develop, SOE listings can be one of them but exchange’s market capitalization. Across our 2009-2015 2 4 are not the only one. case study countries, we find that the largest 2015-2018 7 -1 SOE listings can increase market capitalization In the following, we have investigated the impact by up to 170 percent (Exhibit 11). This effect is Source: Datastream and WFE — World Federation of Exchanges of SOE listings on capital markets development largest where equity markets are still relatively across four dimensions: market size, liquidity, small, i.e., during the early and intermediate spillover effects on non-sovereign debt markets, phase of a market’s development. Where Furthermore, we find that SOEs can be an In some instances, SOE listings have even and the investor base. We would like to remind governments have been able to list a series indispensable source of new listings (Exhibit 13). been the reason behind the creation of a local the reader, that the analysis of the impact of of large SOEs, conduct follow-on offerings or Between 1990 and 2009, SOE listings represented stock exchange, such as in Tanzania, Uganda, SOE listings on capital markets development encourage private companies to list, they could on average 23 percent of all public offerings per Georgia and China. However, the success of may include certain biases (e.g., selection bias, often sustain that growth momentum over an year for our case study countries. The share has those initiatives has not always been clear. Even endogeneity) that neither the studies cited in the extended period (Exhibit 12). been high, especially during the early phase of tough China has been able to use the momentum equity markets’ development — see the examples of SOE listings to kick-start capital markets of Argentina, Brazil, Poland, Morocco and WAEMU. development, most Sub-Saharan exchanges have As a market develops, the share of SOE listings struggled to attract a large number of private as a percentage of total public offerings tends to sector listings (see section of indirect effects decrease — exceptions are markets in Asia, where on page 27). many countries continue to see a significant proportion of SOE listings relative to total listings. 21 See Guriev and Megginson (2006); Subrahmanyam and Titman (1999); McLindon (1996); Kleiman and Morrissey (1994). © The World Bank | Oliver Wyman | The Goverment of the Grand Duchy of Luxembourg | ASEA (African Stock Exchange Association) 24 © The World Bank | Oliver Wyman | The Goverment of the Grand Duchy of Luxembourg | ASEA (African Stock Exchange Association) 25 Exhibit 13: SOE listings as a share of total offerings per year (in percent) We conclude that SOE listings correlate positively degrees — these are Poland and Singapore, with the size of a local capital market, especially and to a weaker extent Romania and Morocco. during the early and intermediate phase. This At a first glance, what all of those four markets 2000 2004 2006 2008 2009 2005 2003 2007 2001 2002 1990 1994 1996 1999 1995 1998 1997 1991 1993 2010 1992 2016 2018 2015 2019 2013 2014 2017 2012 2011 is also reflected by the fact that the share of have in common is their intermediate market SOE listings as a percentage of total market development status at the time of the SOE Argentina 100 69 90 58 0 0 82 64 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 capitalization in EMDEs is generally high, listings — i.e., all four markets had outgrown Brazil 0 73 0 0 38 0 0 89 55 86 0 8 7 8 0 0 0 11 0 0 0 0 0 0 4 0 9 with an average of 30 percent of total market their early frontier market stage and operated Colombia 0 0 0 0 67 0 0 0 0 0 0 0 0 0 0 56 0 capitalization across our case study countries. on the threshold between frontier and emerging For example, in Colombia Ecopetrol alone market status. This also implies that the four WAEMU* 0 80 43 represented 46 percent of the total market countries had a relatively large domestic Egypt 51 30 24 0 0 0 76 0 0 0 0 0 0 0 0 0 0 0 28 capitalization (Exhibit 14). Romania is also a institutional investor base and good market Morocco 100 0 0 0 0 100 0 0 70 0 0 0 0 0 0 0 100 0 0 58 good example, where SOEs have constituted access for foreign investors who, once provided a large share of total market capitalization — with an attractive pipeline of assets, could be Nigeria 0 0 0 0 100 0 0 0 0 0 0 0 0 0 0 0 0 during the hight of the divestment program encouraged to participate more actively in the Poland 0 91 15 64 71 58 76 0 83 46 65 56 3 0 36 49 73 65 58 48 18 0 0 0 0 0 in 2004, SOEs accounted for 65 percent of market local equity markets (see Box 2). In addition, Romania 0 0 11 0 0 0 16 27 0 0 0 0 31 51 39 0 0 0 0 0 capitalization. The empirical literature offers all four countries have had a large enough additional examples: For instance, in Britain, economy with a large number of large, private Singapore 0 0 0 95 0 0 0 0 13 12 27 33 9 23 12 4 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Chile and Singapore, the share of listed SOEs sector companies that had not yet looked to South Africa 0 0 0 0 0 0 0 0 0 0 0 0 41 0 0 16 0 0 0 0 9 0 0 0 0 0 0 0 0 as a percentage of total market capitalization the equity market as an alternative source of had grown more than five times during 1983 capital. The governments successfully raised South Korea 0 0 0 0 26 23 0 48 79 76 10 45 49 7 18 3 0 0 0 8 7 0 0 3 4 0 0 0 0 0 and 2000, from less than US$ 50 billion to awareness and promoted the stock exchange’s Taiwan 69 0 0 0 20 11 28 11 60 21 31 37 3 29 15 0 0 0 0 0 0 0 3 0 0 0 0 0 US$ 3.31 trillion, which is equal to over 27 percent functioning by listing a series of SOEs. Lastly, in Turkey 0 33 89 0 0 0 49 0 27 76 0 19 14 12 49 52 0 26 0 62 0 0 0 0 0 0 0 of the total market capitalization of top listed all four case study countries, the government companies outside the USA.22 had undertaken several SOE listings over * The focus is on Cote d’Ivoire an extended period of time. In the case of Source: Datastream and WFE — World Federation of Exchanges Further to these effects, SOE listings can Poland and Singapore, the two countries that boost an equity market’s size through indirect have seen the largest demonstration effects effects, e.g., by encouraging private companies across our case study countries, the respective Exhibit 14: Share of total market capitalization of selected SOE listings to list. The empirical literature suggests that governments implemented large-scale SOE SOE listings can have a snowball effect on local listing programs, whereby more than 15 Stock equity markets.23 Especially in less developed of the countries’ most valuable SOEs were exchange SOE SOE equity markets, owners of private companies are incrementally sold via the local stock exchange. Date Deal value market cap market cap market cap often reluctant to issue tradable securities until of listing Company (US$ million) Exchange (US$ million) (US$ million) (percent total) the markets are informationally efficient and Despite their similar size and development 25.09.2007 Ecopetrol SA 2,797 Bolsa de Valores 77,82 35,835 46.0 highly liquid. At the same time, investors will be status no demonstration effect could be de Colombia unwilling to entrust their savings to securities identified in Argentina, Egypt, Nigeria and markets until there is an adequate supply of Turkey. The reasons are often a combination of 04.11.2004 PKO BP 2,274 Warsaw 60,136 7,937 13.2 quality securities available for trade. Thus, factors that vary by country, but we can draw Stock Exchange SOE listings could help markets to overcome a number of important lessons. In Argentina, 12.09.2005 PGNiG: 823 Warsaw 83,467 6,432 7.7 this chicken-and-egg problem by growing the government’s heavy reliance on ADRs has Polskie Gornictwo Stock Exchange market size, improving efficiency and ultimately resulted in making the NYSE an attractive listing Naftowe i encouraging private firms to float their shares venue for Argentine shares rather than the Bolsa Gazownictwo SA on the exchange. In other words, SOEs can de Comercio de Buenos Aires. Together with the 01.11.2013 SNGN 535 Bucharest 24,269 4,203 17.3 demonstrate a market’s functionality, including ADRs, liquidity migrated to the NYSE and with Romgaz SA Stock Exchange the existence of a broad investor base, thereby it various listed companies (see Box 3). Similar encouraging private companies to list. We will call effects can be found for countries that have 23.09.2013 Nuclearelectrica 85 Bucharest 18,044 983 5.4 Stock Exchange this a demonstration effect. relied on cross-listings — e.g., Kazakhstan (see liquidity section). In Egypt, the effect of GDRs/ Source: Dealogic Although the literature confirms such ADRs has been exacerbated by concerns over demonstration effects for advanced economies, the reliability of the local market infrastructure, we find evidence for such effects only in four out insider trading and unbridled speculation, as a of the 14 case study countries and to varying result, the initial domestic and foreign investor 22 Top companies includes those mentioned in the top100 business week for advanced economies and the top200 for emerging economies, Megginson 2005. 23 Subrahmanyam and Titman (1999); McLindon (1996). © The World Bank | Oliver Wyman | The Goverment of the Grand Duchy of Luxembourg | ASEA (African Stock Exchange Association) 26 © The World Bank | Oliver Wyman | The Goverment of the Grand Duchy of Luxembourg | ASEA (African Stock Exchange Association) 27 excitement wore off quickly, significantly interest rates. The participation of Kenya’s reducing market liquidity. 24 Instead of attracting pension funds in SOE listings has been relatively Box 2. The importance of pension reforms and Furthermore, thanks to Poland’s accession to additional listings, the exchange saw numerous small, accounting for just about 10-20 percent. foreign investor access to create demonstration the European Union in 2004, its access to foreign delistings as Egypt’s capital market’s regulator As in WAEMU, Kenya’s government had to effects in Poland and Romania investors grew tremendously as foreign investors responded with more restrictive listing underprice many SOE shares heavily to attract became domestic investors, which also led to requirements (see Box 4). a large-enough retail investor base that could The recent histories of Poland and Romania have been a relegation of various controls against foreign absorb the listings. One exception has been remarkably similar: both countries transitioned to a investor participation. Lastly, the case of Nigeria highlights the Safaricom, which attracted a large foreign and market-based democracy in 1989 and have become importance of a stable macro-economic domestic institutional investor base. members of the European Union. Due to their histories Following the expansion of its investor base, the environment (see Box 6). Nigeria has of being centrally-planned economies, both countries government decided to list a series of large SOEs. experienced extreme currency depreciations, Lastly, our case study analysis shows had to undergo significant privatization efforts. The Those SOEs were oil and gas companies and financial which suppressed stock performance, including that there is no indirect effect on market Warsaw Stock Exchange (WSE) is today the largest institutions with the single largest being a US$ 2.7 billion SOE shares. As a result, SOE listing’s signaling capitalization for more developed emerging stock exchange in Central Eastern Europe, functioning IPO of the insurance company PZU SA. Listing the effect to private companies has been small. markets, such as Brazil and South Korea. as a financial hub for the region. The Bucharest Stock largest and most profitable SOEs attracted significant As an equity market develops and reaches Exchange (BVB) has grown significantly as well, albeit investor demand, especially from EU investors. In Furthermore, we could not find any critical mass, demonstration effects at a lower rate. response, private sector listings grew as equity prices demonstration effect for SOE listings in early weaken significantly. Other factors, such became attractive and signaled market efficiency. As stage frontier markets. The two most prominent as capital controls become more important As a transition economy, Poland’s privatization a result, the WSE has become a popular market for reasons are likely to be i) the lack of a large (see Exhibit 15). And although SOE listings plans were key to facilitating capital market growth listings of regional firms. domestic institutional investor base and ii) the have helped to increase foreign investor and bringing private companies to the market. The relatively small size of the private economy participation, it required a change two waves of SOE listings, the first during 1990- Unlike its northern neighbor, Romania’s equity with only a limited number of large private in government policy and regulation 2003 and the second during 2004-2014, exemplify market has seen modest growth. Romania’s market companies that have the potential to list. For for the effects to fully unfold. the importance of a large enough investor base to capitalization as a percentage of GDP stood at around instance, in WAEMU, the low levels of asset encourage listings from private companies. The first 17 percent in late 2019, compared to 49 percent for holdings of the nascent pension fund system privatization wave led to an oversupply of securities Poland in the same period. The country’s privatization has likely prevented the otherwise relatively as the number of listed shares outstripped investor process largely occurred in two waves. During the successful SOE listings (e.g., of Sonatel and Liquidity demand. As a result, the WSE saw a series of delistings 1990s a number of small SOEs were privatized and listed Onatel) from creating any demonstration in 2002-2003 because privatized companies were on the stock exchange. However, those listings were effects for private companies. Because To analyze liquidity effects, we have looked perceived to be undervalued and lost interest in ad-hoc and did not provide the consistent supply of institutional investors were largely absent, at two variables: the bid-ask spread to analyze staying public. This also discouraged many private securities as in Poland. WAEMU’s governments had to underprice their the SOE stock’s liquidity and the turnover ratio companies from listing. However, this dynamic SOE shares significantly to attract a large- to understand the impact on market liquidity. changed in the second privatization wave. In 2012, Romania started its second privatization enough retail investor base that could absorb wave — following a loan agreement with the IMF the listings, which, in return, weakened the Across our case study countries, we find During the second wave, Poland’s privatization and the EU in 2009. Between 2012 and 2016, Romania interest of private companies to list. Further, that most SOE shares have benefited from plan was embedded into a larger structural reform listed four oil and energy companies: Romgaz, Electrica, the absence of long-term capital as provided narrow bid-ask spreads, suggesting an program that, among other changes, transformed Transgaz, and Nuclearelectrica. These listings created by pension funds and insurance companies has adequate level of liquidity (see Exhibit 16). the domestic pension fund system from a publicly a demonstration effect for private companies that kick- likely led to greater volatility in stock prices, Listed SOEs sustained bid-ask spreads on managed defined benefit (DB) system — funded started the development of the local equity market. which may have further discouraged private average of 60bps throughout the five-year through pay-as-you go contributions — to a Each public listing was followed by at least one private companies from listing. horizon post-listing. Those liquidity levels are predominantly privately managed defined contribution company offering (see Exhibit i). Market capitalization likely to be the result of the SOEs’ large size (DC) scheme. As a result, the size of the domestic rose from RON 98 billion to RON 147 billion in 2016. Yet, Kenya’s SOE listing experience is an interesting combined with a broad and diverse investor pension fund system grew quickly, from 1.3 percent the demonstration effect on private companies has case because it shows the complexity of base required to absorb such large listings. In of GDP in 2000 to 6.8 percent in 2004. At the same been significantly weaker compared to Poland due to the factors at play. Despite a relatively large addition, liquidity levels tend to be higher for time, regulation inhibited domestic pension funds Romania’s smaller local investor base which has limited domestic institutional investor base — pension SOE listings with a larger free float (> 15 percent). from investing more than five percent abroad, keeping the local markets absorption capacity. In contrast fund assets represented between 7–12 percent Unless an SOE is extremely large, a free float liquidity within the Polish economy (albeit to the to Poland, Romania’s pension fund assets did not see of GDP during the 2000s — and a moderately below 15 percent usually presents a too-small detriment of the pension funds’ risk-adjusted returns). the same growth momentum (in 2012, pension fund strong pipeline of SOE assets, demonstration investment opportunity for large institutional assets stood at just 1.7 percent of GDP). effects on private companies did not materialize. investors, especially those investing from abroad, Why? Even though multiple factors are likely resulting in lower liquidity levels. This is also at play, a potential demonstration effect was reflected by the fact that global indices list the suppressed through crowding out effects from free-float adjusted market capitalization.25 large government debt issuances and high 24 Lieberman and Kirkness (1998). 25 www.msci.com/eqb/methodology/meth_docs/MSCI_GIMIMethodology_May2019.pdf © The World Bank | Oliver Wyman | The Goverment of the Grand Duchy of Luxembourg | ASEA (African Stock Exchange Association) 28 © The World Bank | Oliver Wyman | The Goverment of the Grand Duchy of Luxembourg | ASEA (African Stock Exchange Association) 29 Box 3. Argentina’s ADR problem As a result, Argentine’s government chose to use ADRs as the main mechanism to sell their SOE shares. Box 2. (Continued) the following three: i) the size of the domestic In Argentina privatization was a direct response to For example, the public offering of Telefonica de investor base, including the importance of pension the near collapse of the Argentine economy in the Argentina in 1991 raised US$ 838 million, of which As a result, Romania had to predominately rely on fund reforms, ii) the access to a large pool of foreign late 1980s. The newly elected Menem administration 60 percent was raised through ADRs offered at the the domestic retail and EU investor base — the latter investors, and iii) a large SOE divestment program aimed to rapidly transform and sell its loss-making NYSE. Likewise, Telecom was sold for US$ 1.22 billion, has been a crucial source to absorb the series of SOE that provides equity markets with a constant stream public enterprises as part of its recovery plan. of which 60 percent were raised via ADRs. Consequently, listings during 2012 and 2016. Further, Romania’s of new, attractive assets over a longer period of time. the locus of trading shifted offshore. YPF’s ADRs pipeline of SOE listings has been smaller and Poland is likely to have seen a bigger demonstration Unfortunately, due to the urgency of the privatization represented more than 75 percent of the listing accompanied by greater uncertainty than in Poland. effect than Romania as its SOE listings have been well program, reforms to strengthen the market amount and have traded more than three times the As a result, foreign investor interest has been weaker planned and carried out regularly over an extended infrastructure of the local capital markets fell short. normal stock. Over time more and more company and more cautious. period of time, creating a constant supply of new When the privatization program started in 1990, shares converted into GDRs/ADRs, leading to a large listings. At the same time, such a demonstration trading value at the Buenos Aires stock exchange number of delistings and creating a significant liquidity Comparing the experiences of Poland and Romania, effect will likely occur only where there is a sufficiently was less than US$ 2.5 million a day, and market problem for the local exchange.I it appears that the creation of demonstration effects large investor base whose interest increases with capitalization was a mere US$ 2 billion. Among other is highly dependent on a number of factors. From each new listing that provides a diversification factors, these low trading values were the result of Thus, although Argentina’s SOE listings boosted the case of Poland and Romania, we could identify opportunity and justifies reallocation of resources. an outdated market infrastructure, including high market capitalization and attracted a large domestic brokerage fees, the lack of an electronic trading investor base in the short term, in the long term it platform and the separation between clearing and created unintended consequences by showcasing the Exhibit i: Impact of demonstration effects on private companies, example of Romania custody services. attractiveness of the international markets over its own exchange. Deal Value ($US million) Electrica SA 600 I Gosse and Yanes (1998). SNGN Romgaz SA Box 4. The importance of size and a good market Egypt’s capital market infrastructure was also of infrastructure — the case of Egypt concern. The brokerage industry was undercapitalized, 400 and the clearing and settlement systems faced Egypt’s privatization program began in 1991 and significant problems. To cite one example, until the resulted in the full or partial divestment of 382 SOEs. introduction of a central depository in 1996, many To sell those SOEs, the government made use of titles remained unsettled, creating frustration across Digi multiple divestment methods, including employment domestic and foreign investors. In addition, weak Communications OMV Petrom SA NV share purchase programs and SOE listings. The overall disclosure and accounting standards fostered insider SNGN Romgaz SA proceeds from the divestment scheme amounted trading and unbridled speculation.I In response, the 200 SNGN OMV Petrom SA to EGP 57.4 billion (approximately US$ 9.4 billion) up capital markets regulator capped market moves for SNGN Romgaz SA Romgaz SA to 2009. any given day creating further skepticism especially Transgaz SA OMV Petrom SA Transgaz SA among foreign investors. Finally, listing standards were Transelectrica SA Banca Transilvania Sphere Despite the large scale of the program (over increased sharply (especially with regard to accounting Nuclearelectrica Franchise 50 listings), SOE listings have not led to any and disclosure), as a result numerous delistings MedLife SA Group SA OMV Petrom SA Conpet SA Banca Transilvania demonstration effects. One of the potential reasons followed. We conclude that Egypt’s SOE listing program 0 AAGES SA relates to scale. The selected SOEs were mainly in exposed the large inefficiencies of the local capital IMPACT Transilvania Broker de Assigurare SA Trade Date the tradable sector — cement, pharmaceuticals, market’s infrastructure, sending a negative signal fertilizers, chemicals, food processing and housing to private companies with the potential to list. 2013 2014 2015 2016 2017 2018 construction. Unfortunately, many of those SOEs selected for listing have been too small to attract Since the privatization program during the 1990s and SPO SOE IPO SOE SPO private company IPO private company a broad interest among local and international early 2000s, Egypt has continued to reform its capital investors. As a result, liquidity for those stocks markets to establish the exchange as a safer and more dried up quickly, negatively impacting stock price transparent destination for domestic and foreign Source: Dealogic performance. This effect was exacerbated by the investors, which included an overhaul of regulatory use of GDRs/ADRs to sell Egypt’s largest and most frameworks applied to key areas such as corporate valuable SOEs. governance, disclosure rules and transparency. I Lieberman and Kirkness (1998). © The World Bank | Oliver Wyman | The Goverment of the Grand Duchy of Luxembourg | ASEA (African Stock Exchange Association) 30 © The World Bank | Oliver Wyman | The Goverment of the Grand Duchy of Luxembourg | ASEA (African Stock Exchange Association) 31 Exhibit 15: Impact of foreign investment flows on equity markets in Brazil and South Korea However, there have been a few exceptions over the past 10 years, accounting, on average, to the rule. For example, Egypt tried to list a for just about 10 percent and 17 percent of total Number of listings (South Korea) series of small SOEs, mostly operating in the trading volume respectively.26 Especially retail 400 manufacturing sector (see Box 4). Unfortunately, investors have been retreating from the market Relaxation of foreign those listings have been too small to incite broad since 2007, a result of a loss in market confidence investor regulation retail and foreign investor demand. As a result, partially due to some incidences of market 300 liquidity has been extremely low. In contrast, misconduct (see Box 10). In consequence, many 200 the largest SOE listings — mainly telecom and oil SOE shares, including those of Marsa Maroc, companies — saw the highest levels of liquidity are currently held by the domestic institutional 100 independent of the SOE’s home country. Thus, investors, especially insurance companies and size matters greatly for liquidity. pension funds, which tend to pursue a buy-and- 0 hold investment strategy that reduces liquidity. 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 Further, we find that SOEs with a lower foreign investor participation also experience lower The significance of a well-diversified investor Number of listings (Brazil) liquidity levels. For instance, WAEMU’s Sonatel base to ensure adequate levels of secondary saw only a very small percentage of its listing market liquidity cannot be overstated. Especially 100 being absorbed by foreign investors. As a result, in frontier markets, foreign investors make up 80 the bid-ask spread has been relatively wide, with 60– 80 percent of trading volume at local stock Relaxation of foreign a monthly average of 200 bps. Similarly, where exchanges. Similarly, in many EMDEs retail investor regulation 60 countries saw a limited participation of foreign investors account for a significant share of total investors in the locally listed SOE shares due to trading volume — for example in Egypt, retail 40 cross-listings or ADRs/GDRs (e.g., Argentina, investors account for about 64 percent and in Egypt), liquidity levels have been subdued. Thailand for about 59 percent of total trading 20 volume.27 Thus, the absence of those foreign 0 Estimates show that where EMDE shares are and retail investors can have a knock-on effect 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 cross-listed, on average, one-third of the total on share liquidity. At the same time, a too-high trading volume migrates to the international exposure to either of those two investor groups SOE Private company exchanges. An extreme example is Kazakhstan, is likely to increase excess volatility and, so, it where the trading volumes of its largest listed requires a domestic institutional investor base Source: Dealogic company, Kazatomprom (~ US$ 3 billion market that can counterbalance some of those trends capitalization), have been concentrated at the and create a certain level of stability. Therefore, London Stock Exchange, resulting in MSCI’s governments have the difficult task to strike inclusion of Kazatomprom shares listed at the the right balance. EMDE governments that have Exhibit 16: Bid-ask spreads for selected SOEs LSE rather than those outstanding at the KSE. succeeded in doing so have usually encouraged In return, this created significant long-term a broad participation across all three investor Average monthly bid-ask spread (percent) problems for Kazakhstan’s own equity market groups while ensuring a well-functioning market development and its potential upgrade to infrastructure that can attract and manage large Country Company Month of IPO Listing month + 1 year + 2 years + 3 years + 4 years + 5 years emerging market status. transaction volumes. Türkiye Halk Bankasi Turkey 05/2007 0,5855 0,81 0,86 0,91 0,41 0,51 AS-Halkbank Lastly, Morocco’s SOE listings highlight the Beyond individual stocks, we find that Romania SNGN Romgaz SA 11/2013 0,15 0,43 0,36 0,33 0,27 0,26 importance of a well-diversified investor SOE listings have improved overall base that spans retail, foreign and domestic market liquidity only where SOE listings IRB-Brasil institutional investors and that is not captive encouraged private companies to join. Brazil 07/2017 0,10 0,23 0,13 n/a n/a n/a Resseguros SA to either of those three. For example, shares Looking at the changes in turnover ratio in Morocco Maroc Telecom 12/2004 0 0 0,43 0,19 0,58 0,40 of the port company Marsa Maroc have seen Poland, South Africa, Taiwan and South Korea relatively wide bid-ask spreads (see Exhibit 15) during 2002-2019 (see Exhibit 17a and 17b), Egypt Telecom Egypt SAE 12/2005 0,30 0,57 0,39 3,33 2,52 1,91 despite large investor demand during the IPO we find no significant correlation between South Africa Telkom SA Ltd 03/2003 0,38 0,82 0,50 0,40 0,52 0,21 and an overall positive share performance. SOE listings and turnover ratio except Singapore Post Although the lack of liquidity is likely the result for Poland. By encouraging large, private Singapore 05/2003 0,78 0,74 0,55 0,90 0,91 0,89 of a combination of factors, one reason has been companies to list, Poland has been able to Ltd-SingPost the absence of a well-diversified investor base. increase its turnover ratio as part of its SOE Poland PKP Cargo SA 10/2013 0,04 0,49 0,83 0,60 0,54 0,63 Morocco benefits from relatively large domestic listing program. Such demonstration effects Societe d'Exploitation institutional investors with a strong appetite did not materialize in any of the other analyzed Morocco 07/2016 0,16 1,18 2,24 1,61 n/a n/a des Ports-Marsa Maroc for equity. At the same time, foreign and retail markets, where turnover ratios remained Korea District investor participation has been relatively weak largely unchanged. South Korea 01/2010 0,13 0,28 0,27 0,50 0,19 0,25 Heating Corp Source: Datastream 26 www.ammc.ma/fr/publication/donnee-statistique 27 www.world-exchanges.org/storage/app/media/research/Studies_Reports/ WFE%20Enhancing%20Emerging%20 Market%20Retail%20Trading%20Report%20-%203%20August%202017.pdf © The World Bank | Oliver Wyman | The Goverment of the Grand Duchy of Luxembourg | ASEA (African Stock Exchange Association) 32 © The World Bank | Oliver Wyman | The Goverment of the Grand Duchy of Luxembourg | ASEA (African Stock Exchange Association) 33 Exhibit 17a: SOE listing impact on turnover velocity for South Africa, Taiwan and South Korea (in percent) The results described previously are more SOE listings have had demonstration effects on nuanced than findings in the empirical literature private companies. Johannesburg Stock Exchange that detect a positive correlation between 150 SOE listings and market liquidity in advanced economies.28 However, there are several factors that may explain the discrepancy: Spillover effects into the 100 non-sovereign debt markets • One large contributing factor is likely to 50 be the absence of a large and diversified In addition to their effect on the size and liquidity investor base in EMDEs. Liquidity usually of equity markets, SOE listings can contribute to requires many investors with different the development of non-sovereign debt markets. 0 investment horizons and risk appetite. The empirical literature suggests that when Hence, the most liquid markets are often private ownership increases, the proportion of Taiwan Stock Exchange those where diverse types and formats of bonds in a firm’s debt structure increases, too. 30 600 investors can be found, including foreign SOEs tend to prefer bank financing over capital investors (e.g., hedge funds, foreign pension markets because they often enjoy preferential funds), retail investors (e.g., HNWI and lending terms, especially in countries with a 400 middle-income households) and domestic strong state presence in the banking sector. institutional investors (e.g., domestic mutual For example, Boubakri et al. (2019) find that 200 funds, insurance companies and pension bank spreads for SOEs are up to 57 bps lower funds). Such a diverse investor base rarely than bond spreads and that SOEs, in general, 0 exists outside advanced economies. enjoy cheaper financing — up to 80 bps lower than comparable private companies. The lower Korea Exchange • Moreover, we find liquidity to be sticky. funding costs are often the product of explicit or 600 Often investors who bought into a SOE implicit government guarantees. 31 listing do not expand their portfolio into other securities listed at the local exchange. However, with an increase in private ownership, 400 In other words, investors’ appetite to trade the access to preferential lending may disappear in other local securities does not increase and the need for more and alternative financing 200 with exposure to SOE shares. The effect is grows — this seems especially true for prevalent in most EMDEs as can be shown privatized SOEs. by the high concentration of market turnover 0 within few shares. For example, across The change in ownership may also affect Monthly share turnover velocity SOE listing our case study countries, median turnover the SOE’s credit spread. As Exhibit 17 shows, concentration of the top 10 companies a partial divestment can increase funding Source: WFE — World Federation of Exchanges stood at about 70 percent of value traded. 29 costs because investors may demand Further, foreign investor liquidity is often compensation for the rise in uncertainty driven by global indices. However, those over the government’s willingness to rescue Exhibit 17b: SOE listing impact on turnover velocity in Poland (in percent) indices include only the largest companies the company in the case of default. Yet, and not entire markets. once a definite ownership structure has 100 been established in favor of private owners, Time of 2nd wave • Capital markets that are more developed, borrowing costs can drop significantly, below of SOE listings such as South Africa, Taiwan and South SOEs’ prior levels, because investors may 75 Korea, are likely to see no or only weak expect lower credit risks due to improved effects because their functionality and governance and firm performance. Therefore, attractiveness is already well-known to we should see an increase in bond issuances, 50 investors and private companies alike. especially by SOEs that have been privatized. In summary, SOE shares show an adequate Our case study analysis corroborates the level of liquidity across the majority of our case results of the empirical literature but finds 25 study countries. However, there seems to be no them to be context-specific. Across our spillover effect to market liquidity except where case study countries, only four SOEs have 2002 2004 2008 2010 2012 2014 2016 2018 2020 28 See Bortolotti et al (2005); Pagano (1993); Subrahmaniam and Titman (1999). Source: WFE — World Federation of Exchanges 29 WEF data. 30 Barbosa et al. (2012). 31 See also Borisova and Megginson (2011). © The World Bank | Oliver Wyman | The Goverment of the Grand Duchy of Luxembourg | ASEA (African Stock Exchange Association) 34 © The World Bank | Oliver Wyman | The Goverment of the Grand Duchy of Luxembourg | ASEA (African Stock Exchange Association) 35 frequently issued bonds before and after Except for Banco Hipotecario, all have grown their IPO: Banco Hipotecario, Ecopetrol, their bond issuance volumes post-listing Brazil‘s Petrobras is an example of how a public Argentina) the non-sovereign debt market Korea District Heating Corp, and Petrobras. (see Exhibit 19). offering can influence an SOE‘s debt structure. In functioned relatively well and could offer the five years following its IPO, Petrobras reduced equal or more attractive interest rates than its reliance on bank loans and significantly the banking sector. The latter is only possible Exhibit 18: Theoretical relationship between credit spreads and ownership (in percent) increased its bond issuances — supported where sovereign interest rates are sufficiently through the Brazilian Development Bank (BNDES), low for corporate securities to become Bond credit spread which included the company‘s debt issuances in attractive vis-à-vis sovereign securities. 5 its long-term yield curve development program. The first local currency bond was issued in 2002, We could not identify any clear pattern just two years after the initial listing. for the impact of SOE listings on credit 3 spreads (see Exhibit 19). For Banco Hipotecario Several SOEs with no prior bond issuances and Petrobras, it seems that the uncertainty started issuing bonds after listing (e.g., YPF, PZU around governance and operational SA, PKO BP and Central Puerto SA). However, performance after restructuring and IPO 1 many of these bond issuances occurred several initially increased credit spreads but then years after the IPO and may not be a direct dropped after a track record had been 0 25 50 75 100 consequence of the SOE listing. Overall, there are established (both in terms of operational Private ownership many factors at play but the functionality of the and financial market performance). For non-sovereign debt markets appears to matter Korea District Heating, credit spreads Source: Theoretical relationship proposed in Borisova and Megginson (2011) Borisova, G., & Megginson, W. L. (2011). greatly for spillover effects to materialize. In all improved immediately post-listing while Does Government Ownership Affect the Cost of Debt? Evidence from Privatization. Review of Financial Studies, 24 (8), countries where SOEs’ bond issuances increased Ecopetrol only started issuing bonds 2693-2737. doi:10.1093/rfs/hhq154 post-listing (Brazil, South Korea, Colombia and two years post-listing. Exhibit 19: SOE debt issuances pre- and post-listing (US$ billion) Exhibit 20: SOE credit spreads of selected SOEs pre- and post-IPO (change in bps) USD, BN 5 years before IPO < > 5 years after IPO 7 Petrobras 6 YPF SA Banco 5 Hipotecario SA Ecopetrol SA 4 Korea District Heating Corp 3 Ecopetrol SA 2 Banco Hipotecario SA Petrobras 1 PZU SA 0 PKO BP Korea District Heating Corp -1 Central Puerto SA -2 -4 -2 0 2 4 6 Singapore Post Ltd - SingPost Years pre and post IPO Central Reinsurance Corp Source: Dealogic Aerospace Industrial Development Banco Nossa Caixa SA –4 –2 0 2 4 6 Loans Bonds Source: Dealogic © The World Bank | Oliver Wyman | The Goverment of the Grand Duchy of Luxembourg | ASEA (African Stock Exchange Association) 36 © The World Bank | Oliver Wyman | The Goverment of the Grand Duchy of Luxembourg | ASEA (African Stock Exchange Association) 37 Investor base expansion particularly in countries with little tradition Across our case study countries, we find during the first days of trading (also referred of retail investor share ownership. 32 supporting evidence for both arguments. to as flow back). For example, Kenya’s KenGen Apart from boosting market capitalization, Thus, governments like to use SOE listings On the one hand, SOE listings were able to and Kenya Airways saw large sell-offs during the SOE listings’ most considerable impact on capital to introduce a “culture” of equity investing attract an extremely large retail shareholder first day of trading. Because the government markets development is on the investor base, and gain popular support for divestments base. For example, in the case of Kenya’s heavily underpriced both listings, under- especially retail and foreign investors. (see Box 5). 33 Safaricom IPO, more than 800,000 retail subscribed investors — mostly foreign and investors subscribed, many of them first- domestic institutional investors — that believed At the same time, empirical studies also time investors (see Exhibit 21). In Singapore the shares were still relatively cheap, bought Retail investors show that such large shareholder bases about 1.3 million retail investors participated them in the secondary market. As a result, the According to empirical studies, SOE listings are rarely sustainable. SOE listings with in the Singtel IPO; in Poland, the floating of share price increased, further encouraging retail can significantly raise the number of retail more than 100,000 investors tend to see PZU and Tauron Polska Energy allowed the investors to sell and quickly crystallize capital investors in a market. A single SOE listing massive sell-offs during the first day country to grow an already large investor base gains. Then came the time when the foreign and can yield over one million shareholders, of listing. 34 from 1.1 million account holders to 1.4 million domestic institutional investors stopped buying account holders (see Exhibit 22). while retail investors continued to sell. The share price fell below the issue price — and in the case Unfortunately, most EMDEs that have seen their of KenGen, it never fully recovered, punishing retail investor base boom on the back of SOE long-term investors (see more details in the listings have also experienced large sell-offs wealth distribution section). Box 5. Retail investor participation in SOE subscribed. Two-thirds of this block of shares listings in Kenya, WAMU and South Africa were reserved for Senegalese nationals and Exhibit 21: New accounts opened during Safaricom IPO (in thousands) institutions, leading to the participation of Kenya: One of the largest public offerings 9,000 Senegalese individuals who paid a total 900 Safaricom IPO in the history of the Nairobi Stock Exchange of CFAF 17 billion (US$ 30 million). This came (NSE) was the privatization of Kenya Airways as a surprise, as low individual participation in 1996 (listed simultaneously on the NSE had been expected based on Senegal’s 600 and the London Stock Exchange). In 1996, the generally low savings rate. In 2001–2002, Kenya Airways privatization team obtained Sonatel shares offered considerable returns the World Bank Award for Excellence for to investors based on the company’s the divestiture of state-owned enterprises. exceptional financial performance. 300 The operation enabled Kenyan institutions and individuals to acquire 34 percent of the South Africa: The Khulisa offer consisted shares issued and international investors in targeting low-income earners by 14 percent. The airline’s employees were able proposing a lock-up period of three months, 0 to enroll in a special program to purchase an individual participation cap of R5000 2006 2008 2010 2012 2014 three percent of the shares. Overall, as many (US$ 725) and a loyalty bonus for individuals as 110,000 shareholders participated in the who retained their shares for at least Source: CMA Kenya domestic offering. two years. On the first day of quotation, 127,000 South Africans invested in Telkom, WAEMU: Initially, 35 Ivorian companies were 60 percent of them through the Khulisa Exhibit 22: Total number of brokerage accounts in Poland (in thousands) listed on the BRVM (including 14 former offer. The Telkom IPO (the first IPO of a SOEs), amounting to a total capitalization public enterprise in South Africa) should 1,400 of US$ 5.14 billion. The listing of the first be considered the first real success story non-Ivorian company (the Senegalese of the black empowerment strategy, since, telecommunications group Sonatel), in 1998, according to the empowerment rating raised the total market capitalization by more agency Empowerdex, in late 2002 black than 20 percent. The 17 percent stake in investors controlled less than 10 percent Sonatel offered for sale was considerably over- of the JSE listed stocks. 700 0 2004 2005 2006 2007 2008 2009 2010 32 Boutchkova and Megginson (2000). 33 Swaminathan (2004); Bortolotti and Pinotti (2003). Source: KDPW (National Depository of Poland) 34 This is also true for private company IPOs with a large retail shareholder participation. For more details see Boutchkova and Megginson (2000). © The World Bank | Oliver Wyman | The Goverment of the Grand Duchy of Luxembourg | ASEA (African Stock Exchange Association) 38 © The World Bank | Oliver Wyman | The Goverment of the Grand Duchy of Luxembourg | ASEA (African Stock Exchange Association) 39 Even if sell-offs by retail investors are not listing a series of SOEs over a sustained period of misconduct, may cause retail investors to convertibility and tax neutrality (see Box 13). unusual, measures can be taken to prevent them has ensured that initial investor excitement exit the market for a very long time. In these from growing too large and potentially hurting is maintained over a longer period, allowing cases investors often liken capital markets When comparing foreign investor participation the long-term development of local capital retail investors to gain confidence that equity to gambling in a casino rather than a wealth across EMDE SOE listings, we find that the markets. These measures include: investments can be part of their savings creation mechanism. 37 We find evidence inclusion of SOE shares in a global index has strategy — in some representative public for such behavior across several case study a positive effect. For example, comparing • Aiming for a diversified investor base listings, like Poland’s divestment of PGE in 2010, countries, including Kenya (after the Safaricom foreign investor participation in Kenya’s KenGen during the IPO. Although SOE IPOs provide retail investors bought up to 25 percent of the IPO) and Morocco. In the case of Morocco, (not included in a global index) with that of governments with a good opportunity to equity. 35 On the other hand, Singapore has retail investor participation initially rose as Safaricom (included in MSCI frontier index), redistribute some of the wealth produced by used a combination of incentives, including a part of the SOE listing program in the 1990s foreign investor participation is significantly those companies, reserving 30–40 percent dedicated retail investor scheme and attractive before collapsing as a result of the market’s higher in Safaricom (see Exhibit 23). We find of an IPO allocation to foreign and domestic dividend payments to sustain Singtel’s large downturn in 1998. Retail investor participation this pattern to be true across all our case institutional investors is likely to enhance shareholder base. slowly recovered in the mid-2000s thanks to a study countries. share price stability due to their different renewed increase in SOE and private company investment horizons. Especially domestic But even where EMDEs have seen flow backs, it listings. Unfortunately, retail participation Contrarily, cross-listings and ADRs/GDRs tend institutional investors can provide a floor to may not necessarily lead to noticeable negative dropped again to historical lows when retail to hurt foreign investor participation in the valuation and thus maintain a certain level effects on the retail investor base. Some of investors incurred losses as part of various real local equity markets. Due to an information of stability. our interviewees highlighted that those large estate scandals. Therefore, creating a sustained asymmetry and home bias, foreign investors sell-offs should not necessarily be interpreted positive investor experience is extremely usually prefer investing in their home markets. • Making use of stabilization techniques, as a sign of investor dissatisfaction but rather important for the development of the retail Thus, making EMDE shares available at such as the green shoe. A green shoe is an a reflection of the more short-term investment investor base over the long term. international financial centers, such as London over-allotment facility. Depending on the horizon of retail investors. Some exchanges or New York City, will reduce foreign investors’ stock price’s behavior, the arranger can either find that retail investors tend to return for new In conclusion, SOE listings provide an excellent incentive to invest locally. Often this creates exercise his green shoe and sell more shares SOE listings provided they have made a positive opportunity to grow the retail investor base, a vicious cycle as liquidity will move abroad, to meet excess demand or buy shares to mop market-adjusted return during previous listings especially in countries with little tradition of further reducing the attractiveness of the local up excess supply, thereby stabilizing the price. (see more information under chapter wealth equity investing. Yet, governments and market market, including the opportunity to get SOE distribution). For example, in Kenya, when the stakeholders should aim to provide the right shares included in a global index. • Creating retail investor schemes with government listed more than 10 SOEs, retail incentives to minimize the risk of large sell-offs incentives for long-term investing. Several investor participation was oversubscribed for all and incentivize longer-term holding periods. Therefore, whenever possible, governments EMDE governments (e.g., South Korea, of them. At the same time, we believe that such should refrain from cross-listings and ADRs/ Singapore and Peru) have created dedicated incentives can create misleading expectations, GDRs and undertake the required capital Foreign investors retail investor programs through which they whereby retail investors expect that every markets reforms that would allow them to offered additional discounts or shares if retail IPO will carry short-term gains. However, this SOE listings also offer an excellent opportunity attract and manage a large number of foreign investors would hold on to their investments expectation is likely to be disappointed as soon to attract foreign investors, most of which investors in their local markets. over a certain period (usually 3–5 years). as a public offering discontinues the tradition require a minimum investment size to make of heavy discounts. Kenya’s retail investors had their efforts cost-effective. This is also Lastly, we find that despite the benefits that • Sustaining dividend payments and offering to learn this lesson the hard way. The Safaricom showcased by the fact that a large proportion foreign investor participation brings, foreign them as a stable source of income (where IPO in 2008 was only marginally underpriced — of the global indices is constituted of SOEs. participation should be managed with care. possible). For specific industries, such as partially due to greater interest from foreign and For example, in 2018, SOEs accounted for Particularly in frontier markets with no or telecom or oil and gas, dividend payments can domestic institutional investors — and even fell about 59 percent of the MSCI emerging market only a small domestic institutional investor be used as an additional incentive for retail below the issue price shortly after the IPO. As index in energy and 44 percent in the financial base, foreign investor participation can lead investors to keep a stock over a longer time. the short-term gains did not materialize, many sector. 38 Across our case study analysis, we find to excess volatility, which in return can damage A good example is Singapore, where Singtel retail investors were deeply disappointed with that foreign investors often use the opportunity market confidence, especially of risk-averse shares paid 1.5–5 percent dividend yield over the Safaricom IPO, resulting in a drop in retail of a SOE listing to either acquire first-time investor segments. a 10 year period. investor participation that is still evident today. 36 exposure in a market (especially in frontier markets) or expand their portfolio allocation This risk is exacerbated in countries with Singapore and Poland are two good examples Where retail investors have had a negative (particularly in larger emerging markets). a volatile macroeconomic environment. where governments have used these measures investment experience and suffered losses However, for those effects to be long-lasting, Nigeria is an example where a volatile to maintain the growth momentum created by during a market downturn, they have been governments should seek to: i) develop a macroeconomic environment combined SOE listings and develop their retail investor base reluctant to return to the market. Compared pipeline of SOE listings which would allow with a stagnating reform process has in a more sustainable way. In Poland, domestic to institutional investors, retail investors foreign investors to diversify their portfolio, led foreign investors to focus on short- pension funds have provided a secure source of tend to be more sentiment-driven in their and ii) create an overall foreign investor-friendly term returns. Hence, foreign flows have demand for listings, stabilizing share prices and investment decisions. A single experience of environment, including guaranteed currency fluctuated tremendously (see Box 6). providing confidence to retail investors. Further, loss, particularly if coupled with a perception 37 Alan (2012). 35 www.globalcapital.com/article/k4tx4h0qmldq/polish-exchange-leads-new-wave-of-cee-ipos 38 Economist (2012). 36 www.businessdailyafrica.com/bd/news/267-000-retail-investors-exit-safaricom-since-ipo-2265398 © The World Bank | Oliver Wyman | The Goverment of the Grand Duchy of Luxembourg | ASEA (African Stock Exchange Association) 40 © The World Bank | Oliver Wyman | The Goverment of the Grand Duchy of Luxembourg | ASEA (African Stock Exchange Association) 41 At the same time, it is likely to narrow the often embedded their divestment programs into investor base to those investors with a higher a wider reform agenda aiming to improve the Box 6. The importance of macro-economic stability — private companies. Consequently, SOE listings failed risk tolerance, such as hedge funds. Thus, overall economy, including strengthening the the example of Nigeria to incentivize any increase in private company share countries that have used SOE listings to kick- macroeconomic environment. flotations. Likewise, the perception of Nigeria’s start their capital markets development have Nigeria’s privatization program during the 1990s equity market as a place for speculation rather than has been an important component of its structural long-term investing is likely to have hindered the adjustment program (SAP) with the IMF, into which development of a large retail investor base. Exhibit 23: Foreign investors’ trading volumes — KenGen versus Safaricom Nigeria entered as a result of large macroeconomic Trading volume — KES (by millions) turbulence during the 1980s. The SAP included Those same challenges persist in Nigeria today, two main components: stabilization of the macro- hindering the development of its local capital 2,000 economic environment, and reform of the economy, markets as a place for long-term savings and including reducing the government’s footprint. investments. Due to macroeconomic volatility, 1,000 foreign investors continue to focus on short-term The privatization program’s integration within the gains rather than long-term investments. For example, broader reform agenda aimed at strengthening the during the large currency devaluation in 2015–2016 — macroeconomic environment has allowed Nigeria engineered by the Central Bank to withstand a fall 500 to successfully list a series of SOEs. Among those in global oil prices — foreign flows reversed before were Okomu Oil Palm, Flour Mills of Nigeria and returning quickly to take advantage of the sudden African Petroleum (now Ardova Plc), all of which drop in share prices (see Exhibit i, ii). Thus, Nigeria’s saw substantial foreign investor participation. Yet, continued volatile macro-economic environment 1,000 a continued volatile macroeconomic environment does not necessarily reduce foreign investor 2007 2009 2011 2013 2015 2017 2019 2021 combined with stagnating reforms led foreign appetite but narrows it to investors with a higher Safaricom KenGen investors to apply short-term oriented investment risk appetite and a shorter-term investment horizon. strategies. In return, foreign investor participation Contrarily, it prevents the participation of long-term Source: Refinitiv fluctuated significantly and led to substantial stock oriented capital, such as foreign pension funds and price volatility, sending a warning of speculation insurance companies. rather than a signal of market efficiency to Nigeria’s Exhibit i: Foreign flows to NSE NGN billions $US/NGN 1,800 400 900 200 0 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 NGN billions NSE Index 1,800 70,000 900 35,000 0 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Foreign investor partipation $US/NGN NSE index Source: SEC Nigeria © The World Bank | Oliver Wyman | The Goverment of the Grand Duchy of Luxembourg | ASEA (African Stock Exchange Association) 42 © The World Bank | Oliver Wyman | The Goverment of the Grand Duchy of Luxembourg | ASEA (African Stock Exchange Association) 43 SOE LISTING’S IMPACT ON For the banking sector, we find that in addition directors and managers bring new experience, to an improved EBIT margin, the ratio of non- new practices, technologies and know-how.41 performing loans in a loan portfolio (NPL, a Particularly, foreign ownership has been ECONOMIC DEVELOPMENT measure of asset quality) and the loan-deposit ratio (a measure of capital funding) improved associated with stronger productivity improvements. For example, Boubakri, Cosset, (see Exhibit 25). In conclusion, efficiency and Saffar (2013) find that foreign ownership is improvements seem to be greatest for those positively related to corporate risk-taking and sectors that operate under market competition that this effect is even stronger in countries The overall positive effect of SOE listings The empirical literature that has analyzed or where urgent restructuring was imperative with better institutions.42 on capital markets development will have the relationship between SOE listings and as SOEs were being disrupted by technology to be viewed in the socio-economic context firm performance shows a huge variation (e.g., telecommunications). In contrast, the In contrast, governments that continue to of a country. of results, from slightly negative to highly impact is smallest for sectors dominated hold a significant share in SOEs have often positive. For example, Megginson (2005) by natural monopolies, such as oil and gas struggled to refrain from political interference Many SOEs not only provide crucial public goods reviewed more than 300 empirical analyses and energy. (see Box 10) or imposing hard budget and services but also employ a large share of on privatization, including SOE listings, and constraints. Thus, performance improvements the population. In the following chapter, we concluded that the impact is overall positive. The empirical literature identifies the ownership have been weaker or did not materialize at all. summarize the effects of SOE listings on i) firm Similarly, Dinc and Gupta (2006) find that SOE structure to be one of the main factors that performance, ii) quality of service delivery, iii) listings in India increased firm profitability influence the impact of SOE listings on firm Lastly, we find that corporate governance wealth distribution, iv) employment and v) fiscal and productivity — even where governments performance. Who controls a company seems and market institutions matter, albeit to a revenues. As mentioned in the introduction, we continue to hold a controlling share. In contrast, critical to a firm’s performance post-listing. For lower than expected degree. In theory, a good do not aim to provide an exhaustive discussion Aharony et al. (2000) find that the return on example, efficiency improvements seem larger corporate governance framework reduces on the respective topics. Rather, our goal is to assets peaks in the IPO-year but then declines for privatized companies than those that remain agency costs and provides the right incentives help policymakers gain a better understanding thereafter for Chinese SOEs that listed shares under majority-ownership of the government.40 for managers to improve a firm’s performance. of the effects of SOE listings on capital markets during 1992–1995. Other studies find that SOE Privatization often leads to changes in the In practice, we find this to be true only in development and beyond. We hope that this listings improve firm performance but only board and management composition. The new rare cases. provides valuable input for government decision where listings lead to a transfer of ownership makers for well-informed decisions about the and control. 39 design of their future divestment plans. Exhibit 24: EBIT Margin across sectors pre- and post-listing The large divergence in results suggests that there are various factors at play that influence Sector Year - 3 Year Year +3 SOE listings’ impact on firm performance. As Utility and Energy 19 17 22 Firm performance we will show below, there are at least four factors on which the impact of SOE listing Transportation 19 21 23 To understand the impact of listings on a on firm performance depends: (1) choice Telecommunications 20 28 31 SOE’s performance, we have complemented of the sector, (2) ownership structure, the empirical literature with an assessment (3) choice of management and (4) strength Finance 26 36 36 of 21 SOEs operating across the five sectors of market institutions. Oil and Gas 10 22 14 with the largest divestments in our case study countries. We studied the following financial Our analysis shows that the impact of SOE EBIT margin improvement EBIT margin stability EBIT margin deterioration metrics, five years pre- and post-listing: i) listings on firm performance varies by sector. Source: Capital IQ profitability and returns, and ii) leverage and For example, controlling for industry trends, capital funding. Overall, we find that the impact the EBIT margin of listed SOEs rises post-listing of SOE listings on firm performance varies for all sectors but oil and gas. Post-listing Exhibit 25: NPL ratio (in percent) greatly, depending on various factors, including performance for companies in that sector the sector, the ownership structure, the choice seems to weaken mostly in cases in which 15 of management and the strength of market governments have failed to open the sector 10 institutions. However, similar to the effects on to market competition. In most cases, capital markets development, the reader should except for the energy sector, operational 5 treat these results with care as the analysis may performance improved already before listing contain biases (e.g., selection bias, endogeneity) when governments started to restructure 0 Year -3 Year +3 Year +5 that could not be fully controlled for. their SOEs (see Exhibit 24). Source: Dealogic, World Bank WDI 40 Megginson (2005). 41 Boutchkova and Megginson (2000). 39 Sun and Tong (2003). 42 Du et al (2014); Clarke et al. (2005). © The World Bank | Oliver Wyman | The Goverment of the Grand Duchy of Luxembourg | ASEA (African Stock Exchange Association) 44 © The World Bank | Oliver Wyman | The Goverment of the Grand Duchy of Luxembourg | ASEA (African Stock Exchange Association) 45 For example, an OECD study found that in Argentina and Colombia provide us with India, firm performance improved even where two good examples: Argentina’s success in Provision of goods and services were simply replaced by private monopolies, governments sold only a minority interest restructuring YPF has been ascribed largely to often accompanied by increases in tariffs. because the corporate governance framework the appointment of José Estenssoro, a former Although governments should strive to mandated the appointment of at least one executive of Hughes Tool Company in Latin improve SOE efficiency, the objective Furthermore, our case study evidence suggests independent board member. China found an America and Argentine oil entrepreneur. During should not be limited to profitability but that even though proceeds from SOE listings are innovative way to use market mechanisms his leadership, YPF improved its financial bottom include targets on access to and quality often transferred to the government budget, to incentivize SOE managers to increase firm line from a loss of ~$1 billion in 1991 to a profit of goods and services provided. There is a the listing allows SOEs to access the local capital performance despite continued government- of $1 billion in 1993.43 Similarly, in Colombia, widespread concern that SOE divestments markets for future investments. A good example ownership (see Box 7). However, contrary to Javier Gutiérrez has been the central figure that in the infrastructure sector will lead to price is Kenya’s KenGen. In 2016, the company issued those examples, we find no or only marginal laid the foundations of Ecopetrol’s turnaround increases and consequently limit access rights worth KES 28.7 billion to fund new wind improvements across most listed SOEs across and ultimate listing in 2006. to goods and services for lower-income and geothermal plants that would generate our case study countries that remained majority households. In the following, we provide an an additional 720 megawatts of electricity. government-owned — with the exception of In summary, the overall impact of SOE listings overview of the most recent findings of the Therefore, we conclude that a combination Singapore. There the government has been able on firm performance largely depends on empirical literature. Due to data limitations, of sector reforms combined with SOE listings to create an efficient “firewall” between itself whether or not a listing is accompanied by a our case study analysis is unfortunately could maximize the impact on delivery of public and its SOEs by setting up a holding company change in ownership and management. limited to anecdotal evidence obtained goods and services. (see Box 11). Therefore, we conclude that listing through our interviews. alone seems to have only a weak impact on firm The effect from listing itself — through the performance in most EMDEs. corporate governance framework and market Empirical literature shows that the impact institutions — seems relatively weak and only of SOE listings on the provision of goods Employment Compared to corporate governance, we find the successful under certain conditions (e.g., and services is not systematic but depends choice of highly qualified management to have a number of independent directors, effective on the government’s willingness to address SOE listings are often perceived to result in greater impact on firm performance. incentive systems). fundamental sector inefficiencies. For example, massive job cuts. This perception has often led Gasmi et al. (2013) note that SOE listings in the to protests by trade unions, which can be one of telecommunication sector can expand and the most vehement opponents to SOE listings ameliorate network coverage if coupled with and privatization. However, results from the Box 7. SOE listings in China — Incentives the unlocking of non-tradable shares sector reforms that create strong institutions — empirical literature and our case study analysis to improve firm performance performance-dependent, the government first and foremost, an independent regulator. cast doubts on this perception. It appears that can induce sufficient investments from a Similarly, the study of Zhang, Parker, and the listing of a SOE in itself does not affect To reduce entrenchment risks in a weak SOEs’ controlling shareholders in the first Kirkpatrick (2008) provides an econometric employment. But where SOE listings include institutional environment, China created stage of the divestment. The government assessment of the impact of privatizations, a prior restructuring of a company, the effect a staged listing process that incentivizes allows only firms that have undergone including SOE listings, on the quality and can be highly negative — unless the effects managers to increase firm value in sufficient restructuring to unlock their non- accessibility of power services using panel can be off-set to some degree by alternative government-controlled companies. tradable shares. data for 36 developing and transition countries employment opportunities. In the following we over the period 1985 to 2003. They find that analyze the short- and long-term effects of SOE In the first stage, the SOE is divided into The mechanism through which the while privatizations improve firm performance, listings on employment, and investigate some of equity share blocks, with a portion of the government shareholders induce corporate they lead to improvements in the quality and the conditions under which SOE listings have led shares being sold to the public. These change, is the use of promotions and accessibility of the goods and services provided to lay-offs and long-term unemployment. shares are tradable on the stock market. demotions of CEOs. The Chinese Corporate only if accompanied by the creation of strong The remainder continues to be controlled Law requires CEOs to be appointed and institutions, quality regulation and enforcement. Even though selling SOEs to outsiders by a local government or other public entity monitored by the board of directors. As a undoubtedly induces deeper restructuring and is non-tradable. In rare cases, those result, government shareholders can exercise In sectors where SOEs and privatized firms than continued state ownership, several non-tradable shares are sold to foreign, control through their shareholdings and operate under market competition, prices are empirical studies argue that when sales grow private companies. associated authority to appoint or dismiss likely to remain stable or decrease even in the fast enough, the increase in labor productivity SOE CEOs. absence of government financial support. For can be offset — causing employment to In the second step, the government allows example, in Côte d’Ivoire, connection costs remain stable or increase. For example, recent the non-tradable shares to become tradable According to Jiang and Wang (2015), this dropped by 20 percent following the privatization research using large data sets over long periods after a defined lockup period. On the unlock staged process achieved success. Analyzing of CI-Telecom, which coincided with the entry of time in Hungary, Romania, Russia and day, a shareholder with non-tradable SOEs that went through the staged listing of several competitors in mobile telephony and Ukraine found no evidence for strong negative holdings unlocks a portion of their shares process, they found a positive impact not internet services. A similar example can be found effects on employment or wages from any and locks up the rest for another period. only on CEO turnover but also on return on in Senegal (see Box 8). In contrast, SOE listings form of privatization, including SOE listings. The unlocking of non-tradable shares is assets, industry-adjusted sales growth rate in the power and water sectors have frequently Where privatization and SOE listings lead to based on specific guidelines. By making and Tobin’s Q. led to higher tariffs as governments in EMDEs employment shedding, other welfare benefits have failed to address fundamental sector can be generated as the remaining workers are inefficiencies. As a result, public monopolies usually paid more. Where the SOE operates in a 43 Gosse and Yanes (1998). © The World Bank | Oliver Wyman | The Goverment of the Grand Duchy of Luxembourg | ASEA (African Stock Exchange Association) 46 © The World Bank | Oliver Wyman | The Goverment of the Grand Duchy of Luxembourg | ASEA (African Stock Exchange Association) 47 strategic infrastructure sector, increases in the no choice but to re-nationalize several of the Wealth creation in SOE listings earn a significant excess market- firm’s performance can accelerate a country’s privatized companies (e.g., Egypt re-nationalized adjusted return — especially in the short-term. economic growth and create employment several of its listed SOEs in 2011 after a long SOE listings have been a popular strategy for For example, Paudyal, Saadouni and Briston opportunities in other sectors.44 series of strikes and protests). governments to redistribute some of the wealth (1998) find that SOE listings are underpriced to created by SOEs to the citizenry. As shown above, a higher degree than private offerings and as a On the other hand, various studies show that The results from our case study analysis also SOE listings can attract a large retail shareholder result create positive returns for retail investors. privatization and SOE listings can lead to large indicate a workforce reduction for SOEs prior base. But can we with confidence say that it also Su and Fleisher (1999) have found similar results lay-offs, especially early on after a listing. to and shortly after listing, which, however, increased their income? In the following, we for Chinese SOE listings. Before a listing, employment shedding is highly turns into employment growth in the medium have complemented the empirical literature by likely at SOEs that are unprofitable or require term. Due to data restrictions, our analysis has looking at the change in share prices one-year Our case study analysis confirms those results. restructuring, such as in the case of Argentina’s focused on the energy sector in Romania and post-listing for all case study countries. We also In our analysis of the share price performance of YPF (see Box 1). Workforce reduction can Poland. Looking at full-time employment, we included Kenya and Morocco as an illustrative selected SOEs, we found only two companies that cause significant opposition, especially in find that the impact is negative between two to example because the specific lessons could be have seen their share prices fall below the issue countries where the prospects of an alternative four years post-listing — reflecting restructuring highly relevant for other EMDEs. Our results find price one year after the listing (see Exhibit 8). employment opportunity are scant. Lay- and efficiency measures — but becomes positive an overall positive impact on wealth creation, the Given the large discount at which most SOEs are offs can lead to long-term unemployment in the medium term when the listed SOEs start magnitude of which seems to depend on various priced, those results are not surprising. However, and increased poverty levels, particularly in to expand successfully (see Exhibit 26). factors, including pricing, distribution policy, the the question remains, what are the implications countries with highly concentrated wealth public offering’s timing, and the strength of the for long-term returns? structures and an underdeveloped private Overall, the impact of SOE listings on market infrastructure. sector. For example, in the Democratic Republic employment remains ambiguous and dependent Several empirical studies have tried to find an of Congo, the privatization of Gecamines on various factors, including the SOE’s pre- The empirical literature and our case study answer through a detailed analysis of the effect (although not through listing) resulted in listing profitability and the country’s economic analysis establish that investors who participate on long-term returns. massive unemployment and wider social costs, structure. The effect also seems to change including the end of education for employees’ over time, as companies expand post-listing. children and a reduction in the quality of To reduce social costs throughout the process, Box 8. Expanding telecommunication liberalizing the sector in the mid-1990s. On education for 73 percent of families, as various governments have put transition policies in WAEMU February, 22, 1995, the National Assembly Gecamines provided education and healthcare in place. For example, in Turkey, the Privatization introduced a law that laid the groundwork among other public services. 45 Where overall Law establishes several compensation and Starting in 1985, the Senegalese government for the privatization process. Sonatel’s conditions continued to deteriorate, protests mitigation schemes available to SOE employees undertook a series of reforms to improve monopoly right was rescinded and a new erupted in response to privatizations and SOE who lose their jobs in the wake of privatization. the performance of the telecommunication framework introduced that organized listings in several EMDEs, leaving some with sector. As part of the first reform package, competition in the sector. Following the the government decided to merge domestic liberalization of the sector, Sonatel was telecommunication providers with the privatized by targeting different investor Exhibit 26: SOE listing impact on employment international ones, creating the national segments as follows: company Sonatel and endowing it with ENEA (2008-11) 101 99 99 148 a monopoly right, which was contingent 1. A bloc sale to a strategic investor (33.33 percent) — France Telecom on achieving five objectives, including the won the bid ENERGA (2013-12) 87 92 101 — expansion of the network and improvement PGE (2009-10) 95 89 66 89 of the service quality. After ten years of 2. A sale of shares to employees (10 percent) TAURON (2010-06) 96 91 90 89 operations, Sonatel multiplied fixed lines connection three fold, from 25,000 to 75,000, 3. Public offering (17.66 percent) TRANSGAZ1 (2007-12) — 102 101 96 reaching a density of about nine lines per 1,000 inhabitants. Service quality improved to 4. Remaining shares were kept with the Note: FTE data for year of listing unavailable, year before listing has been used as proxy some extent, from 47 percent to 50 percent government (34 percent) Source: Refinitiv Eikon for local calls, and from 25 percent to 45 5. Five percent were reserved for a potential percent for inter-city calls. The expansion of African operator the network and the improved quality went hand in hand with an improved financial As a result of the privatization and performance of Sonatel, the turnover trebled liberalization process, not only Sonatel’s over this decade, from CFA 16.5 billion to more efficiency improved (e.g., turnover doubled in than CFA 60 billion, while the value added 1999) but also access to telecommunication increased in the same proportion. Hence, even services was significantly expanded. The before the start of the privatization and listing number of main lines almost doubled in 1999 process, Sonatel was profitable and could relative to the 1994-96 average, from about build on a history of success. 84,000 to 166,000. In addition, Sonatel cut prices, and improved the quality of service. 44 Megginson (2005). The Government determined that Sonatel’s connection charges were cut by 50 percent in 45 Coudouel (2008). performance was not sufficient and went July 1998, from 87,700 CFA to 43,900 CFA for one step further, privatizing Sonatel and an ordinary line. © The World Bank | Oliver Wyman | The Goverment of the Grand Duchy of Luxembourg | ASEA (African Stock Exchange Association) 48 © The World Bank | Oliver Wyman | The Goverment of the Grand Duchy of Luxembourg | ASEA (African Stock Exchange Association) 49 However, all studies had significant • investor participation and create positive methodological issues, e.g., struggling to returns, they can create false expectations Exhibit 27: Share price performance calculate long-term returns and construct test and potentially negative effects for long- Safaricom statistics. And yet, some conclusions can be term investors, if not used carefully. In the drawn from the diversity of methodologies example of the KenGen IPO, short-term Prices/KES SCOM.NR 32.95 used. The overall trend indicates large positive, investors were rewarded with excessive returns while long-term investors were 40 absolute returns — though for some markets they may turn insignificant once adjusted for punished as the share price performed below its issue price for most of the time 30 market trends.46 post-listing. Contrarily, retail investors who bought into the Safaricom IPO in 20 Our analysis faced similar challenges. We have therefore focused on individual cases of SOE expectation of short-term gains were listings that bear important lessons learned. severely disappointed since the degree 10 Kenya’s KenGen and Safaricom (see Box 9) offer of underpricing was significantly smaller the following learnings: compared to previous SOE listings while 0 long-term investors could reap high returns June 2008 June 2010 June 2012 June 2014 June 2016 June 2018 June 2020 • Find the right degree of underpricing to (see Exhibit 27). Governments should avoid the creation of perverse incentives. aim to strike the right balance between Millions Volume 356.39 Although discounts for retail investors can encouraging retail investor participation and incentivizing long-term investing. 28 be extremely useful to attract broad 18 Box 9. Short-versus long-term investment For example, after three years, KenGen’s gains in Kenya CAR was -4.14. 0 The SOE listings of KenGen and Safaricom Fueled by the good (short-term) experience June 2008 June 2010 June 2012 June 2014 June 2016 June 2018 June 2020 in Kenya provide two good, contrasting during the KenGen IPO, the subsequent examples of retail investor participation. The listing of Safaricom in 2008 attracted an KenGen IPO in 2006 attracted a large number even larger retail investor base. However, KenGen of retail investors; the 30 percent share in contrast to the KenGen IPO, investors offering in KenGen by the government was did not see the expected large jump in the Prices/KES KEGN.NR 4.65 more than four times oversubscribed. One of share price during the first day. In fact, the 40 the main attractions was the large discount Safaricom shares saw an only marginal price that the government offered to attract as increase before underperforming their 30 many Kenyan investors as possible. The IPO price for five consecutive years before shares were sold at KES 11.90 with a minimum growing strongly, tripling in price within a 20 subscription of 500 shares. The heavy year. However, the situation was made worse, discount allowed many Kenyan retail investors as in expectation of short-term gains, many 10 to make large gains during the first day of retail investors had taken out loans to buy the listing: The share price closed at KES 40, the Safaricom shares. Due to the interest 0 an increase of 236 percent, putting a market payments, many retail investors could not 2006-2016 2016-2026 value of 87.9 billion shillings (US$ 1.2 billion) wait long for the share price to improve. As a on the company. However, it also led to a result, many Kenyans had to sell their shares Millions Volume 2.71 large sell-off by retail investors as the large below the price they bought, incurring large underpricing rewarded short-termism over a losses on their investments. In contrast, long- 200 long-term investment approach. At the same term investors had been rewarded with large time, long-term investors were punished as gains as the share started to outperform the share dropped after its initial high during their IPO price after more than 5 years — an 100 the first day. Over the three-to-five year period increase of 820 percent between the IPO date post-listing, the KenGen shares significantly and today. underperformed their issuance price. 0 2006-2016 2016-2026 Source: Refinitiv Eikon 46 Megginson et al., (2000). Boubakri and Cosset (1999), Perotti and Oijen (2000). © The World Bank | Oliver Wyman | The Goverment of the Grand Duchy of Luxembourg | ASEA (African Stock Exchange Association) 50 © The World Bank | Oliver Wyman | The Goverment of the Grand Duchy of Luxembourg | ASEA (African Stock Exchange Association) 51 • Timing matters. The KenGen and Safaricom • The broker industry needs to be well IPO stress the need to find the right timing — capitalized and regulated to ensure a a challenge faced by all governments that smooth subscription process. Especially not only aim to maximize fiscal revenue but during the Safaricom IPO, where brokers had also seek to redistribute wealth across their to deal with over one million subscription population. To illustrate, the KenGen shares requests, complaints were voiced that were sold during a bull market, allowing the several brokers failed to return the initial government to achieve a reasonable price paid-in capital in cases where retail investor despite a hefty discount. Simultaneously, subscriptions where declined due to the high short-term investors were rewarded as demand. Hence, many retail investors have prices increased quickly while longer- lost their savings without even investing in term investors were punished with falling the IPO. returns as the market started to contract. In contrast, the Safaricom IPO took place The example of Morocco’s Société Anonyme during an economic downturn. Short-term Marocaine de l’Industrie du Raffinage (SAMIR) investors were disappointed as prices stayed highlights an additional factor that influences subdued while long-term investors, which the long-term return for investors: had to wait five years, were rewarded with high profits. Despite the Safaricom shares’ • Firm performance matters. Although share long-term success, governments should prices do not always mirror a company’s seek to list SOEs in bull markets. Otherwise, operational performance, they usually are institutional investors may be reluctant influenced by it. In the case of Morocco’s to absorb a large proportion of the listing SAMIR, the privatization and listing at the unless it is heavily discounted. local exchange preceded sector reforms that would have ensured the right performance • Governments and banks should refrain incentives would have been in place. As a from encouraging leveraged retail result, SAMIR’s operational performance investing through consumer loans. In remained lackluster and the company both listings, Kenyan banks had extended a eventually had to surrender to competitive significant number of consumer loans that forces when the government decided would allow Kenyans from lower-income to liberalize the market. SAMIR’s weak households to participate in the IPO — at operational performance and consequent average interest rates of 19 percent. Though liquidation translated into weak stock leveraged subscription payed out during the performance and ultimately a suspension KenGen IPO, it left many Kenyans with large from trading. Even though no share losses during the Safaricom IPO which only repurchase offer has been made yet, retail achieved marginal price gains in the first investors that are holding SAMIR shares weeks. Hence, better alternatives would be over the long term are likely to incur losses. to offer smaller denominations or allow retail investors to pay in installments. © The World Bank | Oliver Wyman | The Goverment of the Grand Duchy of Luxembourg | ASEA (African Stock Exchange Association) 52 Funding raised for governments The empirical literature argues that SOE listings raise a larger amount of capital for a given Box 10. The impact of firm performance, in 2002, the former Minister of Privatization, SOE listings can have large direct and percentage of shares relative to other divestment corporate governance and market conduct on Abderrahmane Saïdi, who took over the general indirect, positive effects on a government’s methods, especially where SOE are sold long-term stock price performance in Morocco management of the refinery, succeeded in fiscal revenue. The size and sustainability of incrementally through multiple offerings.47 negotiating an extension of the government’s those effects depends on the success of the However, across our case study countries we find Morocco listed about 13 SOEs over the past market protection. Unfortunately a fire broke SOE listing and the way governments decide mixed evidence. Whether or not a listing raises 45 years as part of its public sector reforms. out at the largest SAMIR plant in the same to use the proceeds. In the following we have more capital for a given share largely depends on Most of the listings were successful in attracting year, resulting in damages that made the looked at the direct effects, i.e., the proceeds the sale structure and the level of development large investor interest and in achieving a positive refinery unusable. Under the threat of a nation- and dividends received from the sale. To a of the local capital markets. For example, in share performance. However, there were cases wide oil shortage, the government decided limited extent, we have also investigated the countries where SOEs have been divested through in which a mix of weak corporate governance, to liberalize the market. SAMIR, which had indirect effect, mainly via the elimination multiple offerings (e.g., South Korea), an initially misconduct and a lack of sector reform had led not seen any significant capital investments of government financial support. Overall, underpriced IPO was followed by competitive to under-performance of the stock and eventual since its privatization in 1997, could not keep it seems that SOE listings can provide prices in SPOs. In those cases, public offerings delistings of the companies. Investors incurred pace with the competition from oil importers governments with a substantial source of usually raised more capital per given share than heavy losses, which has been hurting market and eventually was liquidated in 2016. I The income, which, if wisely used, could offer a comparative trade sale. Similarly, where listings confidence ever since. I, II demise of SAMIR’s operational performance debt relief or finance economic development. involve a large domestic institutional investor was reflected in the share price performance. base (e.g., South Africa, South Korea), there has Société Anonyme Marocaine de l’Industrie du After the initial collapse in the share price Due to their large size, SOE listings can raise usually been no need to under-price the IPO — Raffinage (SAMIR) and in the absence of dividend payments, a significant amount of capital for governments. book-building was preferred over fixed-pricing Bourse de Casablanca decided to suspend For example, Poland raised over US$ 28 billion in these cases. These listings resulted in better Morocco listed SAMIR, its only oil refinery in SAMIR shares from trading in 2015. IPOed between 1990 and 2019, followed by Brazil with or similar prices than achieved through trade 1996 as part of the privatization program. The at a price of 243 DH, the stock last traded at US$ 20 billion and Taiwan with US$ 18 billion. sales. On the other hand, we find examples where controlling interest was sold to a Saudi group, a price of 128 DH, resulting in a potentially In relative terms, SOE listings have provided governments combined IPOs with trade sales to Corral Holdings, in 1997. Under the sale’s large loss for investors. So far, no re-purchase up to one percent of GDP annually for our case strategic investors and received a higher price for agreement, Corral promised to upgrade the offer has been made. II On a positive note, study countries (see Exhibit 28). their SOE. Good examples of this have occurred in existing refinery and build a hydro-cracking Morocco’s authorities learned quickly from Argentina, Colombia and Morocco. unit to transform crude oil into gasoline and their privatization experience with SAMIR, they other petrochemical products. In return, focused on better sequencing sector reforms the government would provide SAMIR with and privatization efforts as well as improved Exhibit 28: Proceeds raised from listings temporary market protection, including the transparency and communication for tariffs on oil imports. The promised capital subsequent privatizations and listings, such as Country Total revenue (US$ billions) Average annual revenue (Percent GDP) investments by Corral never materialized but of Maroc Telecom (2004) and Banque Centrale Populaire (2004). Singapore 6.70 .86 Colombia 3.77 .85 Morocco 3.22 .82 I telquel.ma/2019/02/19/privatisation-de-la-samir-le-peche-originel-du-chaos-des-carburants_1628895 Taiwan 18.42 .40 www.jeuneafrique.com/mag/296330/economie/chute-de-samir-enquete-mauvais-feuilleton-marocain/ Poland 28.47 .37 II www.leboursier.ma/Actus/4961/2019/06/24/La-Samir-les-petits-porteurs-bloques-en-bourse-depuis-bientot-4-ans.html Argentina 4.99 .35 Egypt 1.32 .29 South Africa 1.58 .22 Brazil 19.49 .19 South Korea 16.87 .18 Turkey 9.90 .17 Romania 2.13 .14 WAEMU* 0.13 .13 Nigeria 0.01 — * The focus is on Cote d’Ivoire Source: Dealogic 47 See Megginson (2005). © The World Bank | Oliver Wyman | The Goverment of the Grand Duchy of Luxembourg | ASEA (African Stock Exchange Association) 53 © The World Bank | Oliver Wyman | The Goverment of the Grand Duchy of Luxembourg | ASEA (African Stock Exchange Association) 54 The price difference is usually a result of the of GDP. However, savings depended on how discount provided to retail investors during successful the listing was in setting the SOEs onto the IPO. Yet there are examples, where the a commercial viable path. In a large proportion Box 11. The government’s role as strategic investor — business. Under the presidency of Luiz Inácio Lula intention to list or the price of the listing itself of EMDEs where governments have not created the example of Brazil da Silva, Vale’s management was pressured to have strengthened the bargaining power of a market competition, listed or privatized SOEs integrate vertically and invest into the steel industry government vis-à-vis a strategic investor. For often continue to require government support. Brazil’s privatization program during the 1990s to 2000s because the government was afraid of a potential example, in the case of Safaricom, the government In other instances, private sector solutions has not diminished the Brazilian government’s role in the “Dutch disease” in the Brazilian economy that could had initially struggled to agree with Vodafone have required governments to provide certain economy but rather transformed it. Instead of acting as lead to higher iron prices that ultimately could damage on an appropriate offer price. But the planned securities, such as offtake agreements in the the main entrepreneur of the economy, the government the competitiveness of the manufacturing industry. Safaricom IPO provided Kenya’s government with utility sector, to reduce operational risks, which assumes the role of a strategic investor. The interference went so far that Vale’s former an attractive alternative to mobilize foreign capital, can be expensive. Thus, governments should CEO Agnelli publicly declared that Lula’s Workers’ thereby providing sufficient bargaining power to carefully weigh the direct and indirect fiscal Brazil has kept significant majority and minority stakes Party was interested in controlling Vale. Agnelli was get Vodafone to raise their offer price. Similarly, implications before selling SOEs, independent (often through its national development bank BNDES) eventually forced to resign even though the company the Moroccan government achieved a 27 percent of whether they are sold directly or via a in privatized companies that operate in strategic reported profits of 292 percent at the time. premium on its open tender of Banque Marocaine public offering. sectors, such as oil and gas (e.g., Petrobras) or iron du Commerce Exterieur (BMCE) thanks to the good (e.g., Vale). Not only has this allowed the government The decision to divest a large proportion of its track record built prior in the IPO and subsequent Finally, we find anecdotal evidence that to benefit from some of the financial wealth created SOEs can offer governments an opportunity to offerings. Whether or not public offerings raise governments can expect a recurring positive by the SOEs, it also has allowed supporting firms while re-invent themselves in the role of a strategic more or less revenue than comparable divestment cash flow from dividend payments — provided developing their capabilities. According to Inoue et al. investor, benefiting from the wealth created by those methods appears to be highly context-specific. they continue to hold a share in the company. (2013), government minority investments have helped companies while continuing to provide support For example, in the case of YPF in Argentina, the to improve firm profitability of companies despite for their development. To do so, government’s The large amount of capital raised during SOE government received a recurring positive flow constrained investment opportunities. For example, shareholder rights should be well-organized and listings provide governments with an opportunity of dividends, which rose from US$ 239 million in the case of Aracruz (pulp and paper), the BNDES’ respected. Board directors should continue to be to put their “fiscal houses” in order. For example, in 1992 to US$ 587 million in 1994. 50 Similarly, in 38 percent equity stake allowed the company to finance appointed by the company’s general assembly, the IMF finds that the net receipts from Romania, the government received on average part of its expansion plan, thereby increasing its based on proposals from shareholders, with the divestments, including SOE listings, have mostly US$ 23 million per year in dividends from global competitiveness. government’s stake in decision-making in accordance been saved — i.e., used to retire debt — rather Transelectrica. 51 with its block of shares. At the same time, the than spent.48 Other studies draw a more nuanced At the same time, a government’s minority interest government has to act within the parameters of picture. For example, Macedo (2000 and 2005) SOE listings provide governments with an can invite unwanted political interference. For its new role as a strategic investor. In other words, argues that apart from using some of the proceeds opportunity to transform their role from example in the case of Brazil’s Vale, a large iron the government’s role is focused on the strategic raised through SOE listings for debt relief, the an entrepreneur to a strategic investor and producer, the government has used its position as allocation of capital to those segments of the Brazilian government spent a large proportion of regulator. For example, in the case of Brazil and an investor — empowered by its golden share veto economy that are either of central importance to the their receipts to sustain budget expenditures that Singapore, governments took on the role as a power — to actively intervene in the company’s country’s sovereignty or need government support. ultimately increased fiscal deficits. Thus, whether strategic investor (see Box 11 and 12). This has SOE listings can improve a government’s fiscal allowed the government not only to benefit from position depends on the use of proceeds. recurrent cash flows in form of dividends but also to continue to support the development of SOE listings could also have indirect, positive those firms — where needed. Similarly, where Box 12. Creating agents of divestment — the example Singapore’s agency model has several benefits: effects on government budgets by eliminating governments fear that the commercialization of a of Singapore’s Temasek government financial support to SOEs. However, sector has adverse effects on the prosperity of its 1. It allows the government to actively and such effects are highly case dependent and are citizens, strong and efficient regulation can be put In 1974, the government of Singapore incorporated professionally manage its investment portfolio, likely to materialize only for SOEs operating in in place to ensure better outcomes. Temasek Holdings as a private commercial entity that bringing stability to share capital and creating value competitive markets. The empirical literature would hold and manage investments in government- by instituting strong corporate governance; finds an overall positive trend. Still, these results In conclusion, we find that a government’s linked companies (GLCs). The creation of Temasek has should be approached with caution because it net worth improves insofar as SOE listings allowed the government to lend professionalism and 2. It ensures the long-term fulfillment of public service has often been difficult to determine the fiscal improve SOE performance and result in rising autonomy to the divestment program, decoupling obligations, which were created to ensure privatized savings from divestment and SOE listings due to shareholder value. SOEs listings also have ongoing it from political influence and interference. This has companies continue to contribute to the delivery of data limitations.49 For instance, Davis et al. (2000) implications on a government’s budget through allowed the various ministries that were previously key public services. observe that for 18 middle and lower- income dividend income, reduced financial support responsible for the management of GLCs to concentrate countries the net effect from SOE listings and and tax revenues. Government decisions on on policy making. 3. Provide a pipeline of SOEs that could gradually be the subsequent elimination of government the use of proceeds should reflect these inter- listed based on the capacity of the Singaporean financial support equaled about one percent temporal effects. Temasek’s initial portfolio was valued at S$354 million. market to absorb the listings. Over the years, Temasek gradually divested the initial portfolio of GLCs, some by listing them on the exchange, As of 2019, Temasek managed a portfolio of over which resulted in holdings in 35 GLC’s from the initial S$230 billion, a fourfold jump from S$66 billion in 2004. 48 www.imf.org/external/pubs/nft/op/194/index.htm portfolio (out of more than 100). Temasek re-invested Its compounded annualized total shareholder return is 49 Savings on government financial support are difficult to savings on government financial support are difficult to source from the proceeds in Singapore’s economy. 15 percent in Singapore dollar terms. budget reports. Megginson (2005); McKenzie and Mookherjee (2005); Brune et al. (2004). 50 regulationbodyofknowledge.org/wp-content/uploads/2013/03/Welch_The_Case_by.pdf 51 www.romania-insider.com/romania-additional-dividends-transelectrica © The World Bank | Oliver Wyman | The Goverment of the Grand Duchy of Luxembourg | ASEA (African Stock Exchange Association) 55 © The World Bank | Oliver Wyman | The Goverment of the Grand Duchy of Luxembourg | ASEA (African Stock Exchange Association) 56 WHEN TO LIST? — SOE listings, like any divestment, will always Develop institutional competence and create winners (e.g., consumers, new managers transparent processes and shareholders) and losers (e.g., displaced PRECONDITIONS OF SUCCESS workers, unproductive suppliers and competing firms). Thus, a government will have to ensure Government institutions need to have the credibility that provides investors with AND DRIVERS OF IMPACT that benefits and costs are analyzed and as confidence. At a minimum, investors want equally distributed as possible to ensure a to be protected against expropriation, and broad consensus. property rights have to be well defined and protected through the courts. EMDEs that have put SOE listings before institution-building Set clear objectives and communicate have often payed a high price. them well Once a government has made the decision to or some other powerful central ministry or divest one or several of its SOEs, listings can department. There are a number of reasons for Given the wide range of interests affected Political risk can suppress offer prices and limit provide an attractive divestment method for this set-up: by any significant divestment, trade-offs will the number of reputable long-term investors. many EMDEs. need to be made between stakeholder and The remaining investors often look for • SOE listings often encounter bureaucratic the government. Clearly defined objectives either short-term gains or carefully hedged As our analysis has shown, listing SOEs at the opposition and political resistance — as they are required to make these trade-offs and to arrangements with most, if not all, of the right time and the right conditions can kick- often change the status quo. By locating prevent SOE listings from being bogged down commercial risk being borne by the government. start a country’s capital markets development the group responsible for divestment and in a welter of unresolved issues. For example, while achieving other divestment objectives, listing near the center of government governments must strike a balance between Governments should aim to create a centralized such as raising fiscal revenue and democratizing power, bureaucratic opposition can the interests of line ministries, which may be body that can develop the commercial skills ownership. The following section summarizes be overcome and political issues more more concerned about how the divestment will and ensure an efficient, transparent listing those conditions by identifying i) the effectively managed. affect their policies and the government’s need process that attracts reputable investors. preconditions under which SOEs are successfully to restructure the economy or raise income Many decisions will have to be taken, e.g., listed, and ii) the drivers under which SOE • SOE listings affect many parties inside and for the treasury. which SOE should be listed, should the listing listings create positive effects on capital markets outside the government — including line be underwritten and if so who should best development. Because SOE listings do not take ministries, the enterprise being sold, labor The preparation of comprehensive business manage the offering process. Spreading the place in a vacuum but affect a country’s broader unions, national and local politicians, as cases can be a good way to better understand listing effort over a number of institutions or economy, the last section of this chapter will well as the SOE’s employees, customers, expected outcomes and clarify the key ministries is a mistake that will lead to conflicts also highlight the conditions under which SOE and suppliers. As a result they can be very objectives of the listing. The business case and undermine the institutional capacity listings have positive development effects on the contentious and senior officials often have should consider the costs and benefits for needed. In some countries, governments have key economic variables examined in this report. to intervene to resolve issues and move the the SOE as well as for the wider economy. The chosen to institutionalize the process through process forward. business case should also assess the risks a privatization law — good examples are associated with the listing and identify actions Argentina and Brazil. 52 Some countries have chosen to create a to mitigate them. Preconditions for success fund or holding company that manages the The central body should work independently government’s SOE holdings on its behalf (see Once objectives are set, they will need to but not blindly, specialist independent Minimum requirements for successfully selling example of Singapore, Box 12). This approach be tied to clear and consistent messages external advisers should be hired and external a SOE appear to be achievable for many EMDEs, can be extremely beneficial, especially where that are communicated to all stakeholders. stakeholders consulted. For example, the as highlighted by the numerous successful divestment programs are at risk of being The government should develop a unified Nigerian Stock Exchange has established a SOE listings that include frontier markets. As derailed by changes in the political leadership communication strategy that focuses on the specific department for SOE listings, which a reminder, for the purpose of our analysis an or suffer from political interference. However, long-term benefits of the SOE listing. Clear actively analyzes SOEs and recommends SOE listing is successful if i) the listing has been strong corporate governance is required objectives can also help unite stakeholders and them to the government for privatization and oversubscribed, ii) the shares were successfully for fund or holding company structures to gain public support by highlighting areas where listing as part of its role in the sub-national settled and iii) trade with sufficient liquidity, i.e., be successful. their interests align. It is crucial to manage investment committee. narrow bid-ask spread. expectations, and the communication should The importance of creating public support articulate clear and realistic outcomes that are The overall process needs to be transparent and cannot be over-emphasized. Across measurable and that can be tracked throughout should make use of competitive procurement Gain political commitment and high- our case study countries, interviewees the process. Some governments have created methods wherever possible. A competitive level support unanimously agreed that if governments websites through which they have provided and transparent vendor selection process has Most SOE listings take place as part of a broader cannot secure support from labor unions, up-to-date information on their SOE listings — been successful in preventing collusion and divestment program that sits at the center of employees and the wider public, risk of a medium that, if well-promoted, can reach a ensuring that the government can meet all of its the government, attached to the president’s or failure increases significantly and can result broad audience. political and economic objectives — especially prime minister’s office, the ministry of finance in re-nationalization. 52 For further details on how to create a strong privatization process see: www.oecd.org/corporate/a-policy-maker-s-guide- to- privatisation-ea4eff68-en.htm © The World Bank | Oliver Wyman | The Goverment of the Grand Duchy of Luxembourg | ASEA (African Stock Exchange Association) 57 © The World Bank | Oliver Wyman | The Goverment of the Grand Duchy of Luxembourg | ASEA (African Stock Exchange Association) 58 regarding the nomination of the right investment develop; liquidity is correlated with the size of the radical transformation of the operating struggle to operate at a price that is profitable for banks and legal advisors. Similarly, if an SOE the free float and investors require sufficiently models through a mix of technology transfer, service providers and affordable for consumers requires restructuring the process needs to be large investment opportunities to justify costs. capital investments and workforce up-skilling. — especially in countries that require large transparent and bound to clear objectives and An MSCI risk-return analysis of the Emerging In each of the cases, the new business model capital investments to upgrade their networks. time lines to guarantee continued support from Markets and Frontier Markets Indexes vis a was established three to four years before the Although there are a few successful examples, the public. There have been too many instances vis the MSCI World Index shows that company SOE’s listing.53 In contrast, the water and sewage e.g., in Argentina, they required significant sector of fraudulent restructuring and privatizations size drives risk-adjusted returns. Therefore, sector has proven to be very difficult to divest reforms and a population willing to pay a higher which ultimately have risked the success of the offering size is especially important to attract and list. Water and sewerage businesses often price for those services. listing and created discontent. Wherever there foreign investors. is serious risk of corruption in the restructuring process it may be better to list the SOE before Profitability: To meet listing requirements, Exhibit 29: Sectors of disruption restructuring or not divest it at all. SOEs usually need to show a track record of Disruptability index industry sector matrix — 2018 results profitability before they can list. As a result, some SOEs may require restructuring before their Current level of disruption Develop an efficient market infrastructure shares can be offered to the public. While some SOE listings require a well-functioning capital governments have successfully restructured their .80 Viability Volatility markets infrastructure to attract and manage a SOEs on their own, other governments partnered 18% of companies 33% of companies broad shareholder base. This includes a well- with strategic investors — as was the case of capitalized broker industry that can handle a Safaricom in Kenya or Aeromexico in Mexico. .70 large volume of subscriptions, the existence SOE restructuring is generally a long-term of credible custodians that function as safe- operation (6-10 years), specifically where work Communications and media Infrastructure and keepers on behalf of investors, appropriate force restructuring is required. However, there Retail transportation services and well-enforced disclosure and accounting are certain sectors that may require no or only .60 standards and a strong trading, clearing limited restructuring of the workforce and thus Consumer Insurance and settlement infrastructure. Where SOE may be better suited especially in the beginning High-Tech goods and 2018 weighted average .51 listings occurred prior to the development of a national privatization program. services Banking .50 Automotive of local capital markets, governments have Software and platforms often divested their SOEs via ADRs/GDRs Sector: Because of the need for size and Travel Industrial equipment and machinery or dual-listings because domestic market profitability, SOE listings suit some sectors Energy Natural resources infrastructure was not sufficient for foreign better than others. According to our analysis, Life sciences .40 Health Utilities Capital markets investor participation. the telecommunication sector has seen the highest success rates, followed by energy and Chemicals Examples are Argentina, Kazakhstan’s and banking. These sectors usually have a higher Egypt. The consequences are often difficult to capital and a lower labor share when compared .30 reverse. In the case of Argentina, the heavy to other industries (e.g., manufacturing). The reliance on ADRs has slowly but surely drained restructuring of these industries usually focuses the local exchange of its liquidity and ultimately on the productivity of capital rather than Durability Vulnerability its listed companies. Similarly, the listing of labor, requiring fewer job cuts and less time. .20 11% of companies 2018 weighted average .54 38% of companies Kazakhstan largest SOE (Kazatomprom) at the Restructuring can often be achieved in two .20 .30 .40 .50 .60 .70 .80 LSE has made it extremely difficult for the local to three years without a complete workforce exchange to achieve the liquidity needed to be restructuring. Examples of successful SOE Susceptibility to future disruption upgraded to Emerging Market status because a listings that did not go through an extensive Note: 0-1 scale (1 = most susceptible/disrupted) large proportion of the stock’s liquidity is traded workforce restructuring include Ecopetrol, Source: Accenture research’s disruptability index, September 2017 in London. Petrobras, Romgaz, Banco do Brasil, and Türkiye Halk Bankasi. Similarly, sectors that experience disruptions (see Exhibit 29) may require no or Chose the right SOEs and prepare them well only limited restructuring and are easier to list. A for listing good example is the telecommunications sector, Although SOE listings should be preferred which in the late 1990s faced rapid disruption over other divestment methods, it is unlikely from mobile technology. Many SOEs built that every SOE can be successfully listed at an around fixed-line monopolies were ill-equipped exchange. Successful SOE listings usually have to compete with the new mobile operators and the following characteristics in common: needed to restructure their business models rapidly. Many SOEs partnered with strategic Size: Because public offerings are expensive, investors (e.g., Vivendi for Maroc Telecom, divestment via listing should only be pursued Vodafone for Safaricom) that acquired a stake for larger SOEs. Capital markets require scale to in the SOE (via trade sales) and then supported 53 hbr.org/2018/01/how-likely-is-your-industry-to-be-disrupted-this-2x2-matrix-will-tell-you © The World Bank | Oliver Wyman | The Goverment of the Grand Duchy of Luxembourg | ASEA (African Stock Exchange Association) 59 © The World Bank | Oliver Wyman | The Goverment of the Grand Duchy of Luxembourg | ASEA (African Stock Exchange Association) 60 Choose a price discovery method based on during bull market phases. This approach also the opportunity to learn and build capacity. frameworks (e.g., corporate governance) to be your target investors ensures that offer prices are perceived fair and Thus, a government that seeks to support updated and the financial service industry to criticism of “selling the country’s crown jewels capital markets development through SOE build the required skills. Contrarily, governments The choice and efficiency of the price discovery too cheaply” is avoided. listings will have to develop a comprehensive should pursue a fast listing process where a process are crucial components of any SOE listing program. SOE is profitable, not too large and the capital listing as it allows for fair and consistent value Offering an appropriate discount for certain markets liquid. In such a scenario, there is creation and increases the likelihood of a broad groups, such as retail investors and employees, To maintain public support, the easiest and no need for governments to drag out the investor base to participate. In some regards, coupled with incentives for long-term least controversial sales should be executed divestment process. the price discovery is even more critical for SOEs investments, can lower the risk of losses for first. This also allows the government to build than for private company IPOs, since a wrongly retail investors and not only increase public a track record and gain investor confidence. Aim for a large free float set price may lead to public opposition. support but also make it attractive for retail Policy makers should allow sufficient time for investors to return to the market for new IPOs. listings to be recognized as successful and for SOE listings are usually large in size and, even According to our analysis, countries have the financial industry to develop and acquire though they ensure adequate liquidity levels, faired well that have chosen to sell their SOEs Lastly, global market conditions play a the necessary skills. we find that the impact of listings on market in tranches and chose their price discovery crucial role in attracting foreign investors, capitalization and stock liquidity is significantly mechanism accordingly. For example, the fixed as they influence FDI trends and a country’s better where SOE listings had a large enough Ensure an economy of scale price method has proven to be efficient with attractiveness. Though perfect timing is hard free float (>15 percent). retail investors. A fixed price can benefit from to plan, governments should be well prepared For governments that aim to maximize the underpricing because it captures demand to exploit opportunities when they present impact of SOE listings on capital markets Target a diversified investor base and creates a positive experience for retail themselves and sell companies when market development, the size of the economy and the investors. Underpricing should not be too high; conditions are right. existence of large private companies with the Governments have several difficult decisions the risk of a large sell-off during day one of potential to list is particularly important. Even to make regarding share allocation during the IPO dramatically increases with the degree though a stock exchange can survive on a few public offerings. of underpricing. SOE shares, markets require economy of scale Drivers of impact to function well. Whether an SOE listing has any One decision concerns the participation For the domestic institutional investor and demonstration effects will also depend on the of retail investors. Retail investors are an foreign investor tranche, a book building Because SOE listings have serious consequences size of the overall economy and the number of important target group for SOE listings, process is likely to be the best approach. for capital markets development and the large companies within it. Smaller countries not only because governments often aim It allows for fair and transparent price broader economy, the drivers of impact are may need to find innovative solutions to attract to redistribute some of the wealth created determination, often achieving slightly better at least as important as the preconditions foreign companies because their ability to by SOEs but also because they can absorb a offer prices than alternative methods. for a successful listing. Ultimately, impact is create scale may be limited by the size of large proportion of the listing, especially in the base on which the public will judge their their domestic economy. frontier markets. Retail investor participation governments and not by how much a listing is desirable, but governments need to find List according to market conditions was oversubscribed. As defined above, a the appropriate structure and incentives to The timing of an SOE listing is incredibly listing is seen as impactful when it creates minimize adverse effects. Retail investors important to create long-lasting, positive effects positive direct and indirect effects on market Transaction specific drivers often have a short-term investment horizon on capital markets development. Governments capitalization, listings, liquidity and investor compared to pension funds and insurance should aim to list based on the capacity of their base development over the short, medium and companies. Higher market volatility can Divest incrementally through respective equity markets to absorb a new long term. be expected for frontier markets with high multiple offerings listing. As our analysis has shown, only where retail investor participation. Therefore, the investor base is large enough to absorb SOE divestments are usually a multi-year governments should chose the allocation a listing, offer prices will appropriately value process and rarely create 100 percent privately- amount reserved for retail investors carefully. an SOE, and send a positive signal to private Political and economic drivers owned companies during the initial offering. The retail allocation should vary according to companies encouraging them to list. Especially extremely large SOEs, such as in the development stage of the capital market. telecommunications or oil and gas SOE, should Governments should also consider introducing Create a pipeline of SOE listings Further, governments should aim to sell during be divested in multiple offerings over several incentives for retail investors to invest longer- times of economic expansion but if possible For governments aiming to develop their local years so as not to overwhelm the national term. For example, in South Korea, the avoid market peaks. This is especially important capital markets, the impact of SOE listings is stock markets’ absorption capacity. A gradual government has offered a more significant for frontier markets that heavily rely on retail largest where there is not one but multiple SOEs process is also the better choice from a value discount to retail investors willing to invest investor participation and have yet to build in the listing pipeline. SOE listings can expand generation perspective. SOEs sold in a number longer-term. An alternative solution could be market confidence. As shown above, retail and diversify the investor base if they provide of distinct offerings have often seen an increase creating mutual funds that pool retail investor investors participated in new listings only if large enough diversification opportunities. in share price over time, thereby maximizing demand and make investment decisions on their experience during previous investments Private companies are more likely to be attracted the government’s receipts.54 Divesting slowly their behalf, thereby increasing diversification had been positive. Whether that experience to the market if a number of companies had provides sufficient time for legal and regulatory for individual investors. is positive in the short-to medium-term successfully floated their shares and traded largely depends on market conditions. Hence, successfully in the local market. With every governments should aim to sell their SOEs new listing, local financial services players have 54 Megginson (2005). © The World Bank | Oliver Wyman | The Goverment of the Grand Duchy of Luxembourg | ASEA (African Stock Exchange Association) 61 © The World Bank | Oliver Wyman | The Goverment of the Grand Duchy of Luxembourg | ASEA (African Stock Exchange Association) 62 Mutual funds have to be carefully regulated Romania has used a slightly different solution. and monitored to minimize fraud and The government created Fondul Proprietatea, Box 13. Creating the right enabling • Legal and information infrastructure: mismanagement, such as from insider control an investment fund that has managed several environment for foreign investors the protection of property rights and or inadequate legal protection of shareholder of the government’s SOE investments. Fondul contract enforcement. voting rights. Mutual funds may therefore Proprietatea sold its SOE holdings gradually, in Our estimates suggest that institutional not be viable in countries with a weak line with the absorption capacity of the market investors across the OECD countries • Data: quality data on a macro- (e.g. institutional environment. while a domestic institutional investor base allocated about US$ 30–35 trillion to listed economic growth, government debt was developing. equity in 2018 with an increasing amount forecast) and micro-level (e.g. a firm’s A second difficult decision concerns the allocated to EMDEs. Over the past decade sales performance, equity return, participation of foreign investors. Foreign institutional investors have moved to a global leverage) that is easily accessible. investor participation can be important to asset allocation framework that allocates ensure a stock’s liquidity. Especially in frontier Capital markets drivers increasing amounts to EMDEs — the Pension • Size of listed companies: a certain markets most liquidity is generated by foreign & Investments Magazine puts the average minimum investment size that investors. In many cases, they have allowed allocation of institutional funds at about five allows large institutional investors Strengthen the legal and local stock exchanges to absorb larger listing percent in 2017, up from four percent in 2010. to justify their costs and results in regulatory framework amounts and improve listing prices. However, Most institutional investors will follow a efficient deployment of their assets foreign investors are often among the first to Because SOE listings focus on attracting benchmark process and measure their under management. divest their holdings, especially in economic minority shareholders, they require an performance against global and emerging downturns, which increases the risk of excess adequate corporate governance framework market indices. For example, out of a total • Liquidity: an exit option (independent market volatility. Based on these observations, and well-enforced minority shareholder rights. US$ 12 trillion assets benchmarked against of price) at any time, a requirement that governments should aim to attract foreign Legal protection for minority shareholders MSCI indices, about US$ 1.5 trillion of assets foreign investors value, especially after investors, but should decide on an allocation provides investors with confidence and offers were benchmarked against the Emerging the financial crisis. amount that reduces potential for adverse an additional layer of supervision. Minority Markets MSCI in 2019 — with only 20 percent effects. As one of our interviewees summarized, investors can have a deciding vote in areas in passive investment strategies. This • Tax: a level playing field that ensures “a capital market can survive on the basis of where the government or the controlling indicates that emerging markets investors a fair treatment of foreign vis-à-vis foreign investors, but in order to develop it shareholder may be conflicted. 55 For the stock are mostly active investors that follow a domestic investors. requires a domestic institutional investor base.” market to enforce its full disciplinary pressure, detailed investment process to select specific In any case a foreign institutional investor base strong minority shareholder protection markets and companies. Although the benefits of foreign investor is a component for EMDEs to develop and a is required. participation in domestic capital markets suitable enabling environment needs to be put Overall, foreign investor participation is likely can be large, the timing and conditions for in place, e.g., FX convertibility and tax neutrality Good corporate governance is critical to to depend on a country’s credit worthiness a country to liberalize should be carefully (see Box 13). ensure that SOEs and privatized firms operate and whether it has a continued strong track chosen. Foreign investors are driven by efficiently and is essential for companies to record in its capital markets that includes the relative yield premia, and so their investment The majority of a SOE listing should ideally be attract investment (see Box 14). Special attention following conditions: decisions can reverse quickly, causing absorbed by the domestic institutional investor should be paid to boards’ independence and increased market volatility. Therefore a base. Domestic institutional investors, such professionalism to deter political interference • Accessibility and good settlement successful liberalization of capital markets as pension funds and insurance companies, and entrenchment. Recent empirical studies infrastructure: the ability to open an requires a certain degree of domestic market are long-term investors that can help in lower suggest that politically connected SOEs are onshore account easily and have access to development first, including: market volatility by balancing out the effects of common among listed companies in advanced at least one bank that can service foreign short-term investors and volatile foreign flows. economies and EMDEs. Political connections investment flows and meets international • A large domestic investor base that are prevalent in firms operating in strategic standards. In addition, foreign investors has the capacity to keep liquidity in However, in many frontier markets, such a industries and jurisdictions with weak judicial require an effective way to port money the country, including times of larger domestic institutional investor base does not independence. 56 Many countries have devised in and out of a country and prefer international liquidity outflows; exist and may take time to develop. As a result specific procedures for board nomination and economies with either no capital controls many governments had to focus on “next appointment to ensure a competitive process or stable capital control policies. • A strong central bank with well- best solutions.” For example, in Brazil, a large and have set minimum requirements for board functioning monetary policy and liquidity proportion of SOE shares — especially during composition to include a minimum number of • FX convertibility: Confidence in a management tools to quickly respond to the 1980s and 1990s — was absorbed by the independent board members to balance state- country’s exchange rate regime, any larger investment in- and outflows. Brazilian Development Bank (BNDES). appointed representatives. supported by a low and stable inflation environment. The presence of a developed foreign exchange market that allows currency to be converted at any time. 55 Roland (2001); Svejnar (2002). 56 Bortolotti and Siniscalco (2004). © The World Bank | Oliver Wyman | The Goverment of the Grand Duchy of Luxembourg | ASEA (African Stock Exchange Association) 63 © The World Bank | Oliver Wyman | The Goverment of the Grand Duchy of Luxembourg | ASEA (African Stock Exchange Association) 64 Minimize transaction costs Consequently, market infrastructure costs Make use of low interest rates Generally, it seems that sovereign debt and in EMDEs need to be minimized as much equity markets complement each other in a Transaction costs in EMDEs can be very high. as possible, while ensuring robust and In many EMDEs, sovereign interest rates low-risk environment or periods of economic On average, secondary trading costs for reliable processes. are high, which, combined with a relatively expansion. As more income becomes available, emerging market equities are three times small domestic investor base, can crowd out demand for both assets grows in unison higher than those of advanced markets and In addition, the costs for companies to list demand for other financial assets. Investors (see Exhibit 30). However, in higher-risk six times those of the United States. For at an exchange can be high and discourage use the sovereign yield curve as a benchmark environments or during periods of economic example, total custody and agency costs listing. For example, in some EMDEs listed to determine their required returns. If interest contraction, the relationship changes and range between 15 and 75 bps. The magnitude companies are obliged to publish their audit rates are high, companies will have to offer a the demand for lower-risk sovereign debt is of these costs can create a large hurdle for reports quarterly in newspapers and send higher risk-adjusted return to attract investors. substituting the demand for higher risk equity. a foreign investor to generate value on their physical reports to each investor. A potential Many companies in EMDEs have access to In environments that are generally higher investment. To compensate, foreign investors solution to achieve lower listing costs can be bank loans with more favorable rates, as risk, i.e., where interest rates are persistently must outperform their equity investments by through digitalization, as in the example of an alternative to rates on non-sovereign high, there seems to be a general preference 100-150 bps. Singapore (see Box 15). debt securities that are often too high to be for sovereign debt (e.g., Turkey, Kenya, or attractive. Thus, spillover effects from SOE WEAMU). The empirical literature also argues listings in the non-sovereign debt markets are that where interest rates are high, companies likely to be limited where sovereign interest will have to offer a significantly higher return rates are prohibitively high over extended to investors, which creates a barrier of entry periods. High interest rates are often a result and reduces the attractiveness of the equity Box 14. Corporate Governance in Brazil — The recent adjustments have focused on of insufficient fiscal prudence and weak fiscal market to raise financing for companies. We the Novo Mercado minority share holder protection (minimum management. Therefore, SOE listings should be therefore conclude that the impact of SOE free float, 100 percent tag along and embedded in a longer-term plan to strengthen a listings on capital markets development, The Brazilian Novo Mercado is a case for better-defined delistings process), board country’s fiscal performance. primarily through its demonstration effect on how the listing segment was repositioned to independence and periodic independent other private companies, is higher in countries attract investment from foreign institutional review of corporate governance and board The effects of high sovereign interest rates where sovereign interest rates remain stable investors. Launched in 2000 as a response as well as the requirement to publish news are less clear-cut for equity instruments. and low. to international investor complaints and and information relevant to investors in stagnating international interest, the English and Portuguese simultaneously. segment was introduced for companies Most partially listed large and smaller SOEs Exhibit 30: Interest rates — crowding out effects on equity? who voluntarily adhere to the code to are now part of Novo Mercado (e.g., Banco Correlation coefficients between equity indices and benchmark rates adopt corporate governance practices do Brasil, Braskem, Embraer, Electrobras, in addition to those that are required by Petrobras). The government aims that all new law in Brazil. By 2010, the Novo Mercado SOE listings conform to the higher corporate Advanced economies Case study countries included 174 companies, accounting for governance standards that Novo Mercado United States -0.58 Argentina 0.33 Singapore -0.54 65 percent of market capitalization and 79 represents. Other markets have since worked percent of trading volume. Listing criteria to replicate the model, e.g., the Romanian United Kingdom -0.63 Turkey 0.30 Taiwan -0.61 for the segment have been reviewed in Bucharest Stock Exchange’s “Transparency Hong Kong -0.66 Egypt 0.06 Morocco -0.61 2008, 2011 and most recently in 2017. Plus” listing segment. Germany -0.84 Nigeria 0.05 Romania -0.69 Brazil -0.16 South Korea -0.73 South Africa -0.47 Poland -0.74 Colombia -0.78 Box 15. Low transaction costs through services with an online application and Numbers reported are Pearson correlation coefficients for data gathered from Thomson Reuters. The data generally digitization in Singapore verification process that opens new retail covers years 2000 to 2020, although shorter for countries with limited data availability. The benchmark rate is the yield on securities depository accounts in 15 minutes. the 10-year government benchmark bond — the only exception being Argentina where the 7-year bond is used. The most The Singaporean monetary authority is The Singaporean monetary authority also commonly used equity indices are used. focused on providing low cost and efficient regularly reviews the effectiveness and cost mechanisms for the participation for retail efficiency of the entire securities processing investors. The security depository, CDP, infrastructure to identify opportunities to operated by the Singapore exchange (SGX) eliminate costs while guaranteeing high offers free securities depository accounts resilience to reduce overall investment costs, for retail customers and highly electronic for institutional and retail investors. © The World Bank | Oliver Wyman | The Goverment of the Grand Duchy of Luxembourg | ASEA (African Stock Exchange Association) 65 © The World Bank | Oliver Wyman | The Goverment of the Grand Duchy of Luxembourg | ASEA (African Stock Exchange Association) 66 Exhibit 31: Behavior of equity indices versus sovereign benchmark rates in Poland and Turkey Develop and diversify your investor base effects of SOE listings are likely to be limited, unless alternative solutions can be developed. Poland, 100 — value in January of 2010 SOE listings require a sufficiently large Those solutions could include the creation and domestic institutional investor base, especially participation of state-owned investment funds if they are to create demonstration effects for or support from national development banks. 200 the broader capital markets. Many countries that have successfully listed their SOEs have Foreign investors can be a good temporary engaged in pension fund reforms before or substitute, but their impact on market during their SOE listing programs (e.g., Chile development is likely to be more extensive and 150 and Poland, see Exhibit 32). These pension sustainable during the later phase of capital fund reforms have not only ensured that the markets development as their participation local stock exchange could absorb large SOE comes at a cost — e.g., inducing higher market listings but also allowed the listings to have a volatility. Foreign investors have specific 100 demonstration effect on private companies. requirements (see Box 13) that include the Where pension fund reforms have been more existence of a domestic institutional investor challenging, governments have supported the base that can provide them with an exit option. development of other long-term institutional This is crucial for governments that aim where 50 investors, such as the mutual fund industry in governments aim to attract long-term interest Brazil or the insurance industry in Thailand. from foreign investors. In countries where a domestic institutional 0 investor base has yet to develop, demonstration 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 Exhibit 32: Pension fund systems (figures in percent) Turkey, 100 — value in January of 2010 Pension Fund Pension Fund 200 Assets/GDP Assets/GDP Pension Fund Workforce Country Pension System in 2008 in 2018 Asset Growth Covered Voluntary personal Brazil 19 26 7 13 and occupational 150 Colombia Mandatory 14 24 10 45 Mandatory and Mexico 11 16 5 67 voluntary personal 100 Poland Voluntary personal 11 9 -2 68 Romania Mandatory — 5 5 60 50 Singapore Provident funds 60 80 21 82 South Korea Mandatory 7 29 21 17 2012 2014 2016 2018 2020 Taiwan Mandatory 4 23 20 50 Voluntary personal Equity index Benchmark rate Turkey 1 3 2 20 and occupational Source: Refinitiv Eikon Source: OECD, supplemented with individual country statistics © The World Bank | Oliver Wyman | The Goverment of the Grand Duchy of Luxembourg | ASEA (African Stock Exchange Association) 67 © The World Bank | Oliver Wyman | The Goverment of the Grand Duchy of Luxembourg | ASEA (African Stock Exchange Association) 68 interests of incumbent stakeholders. There are Other key drivers of impact many examples of privatizations, including SOE to ensure a strong operational performance for the overall market. Although a controlling listings, that resulted in the creation of private post-listing. In countries with developing shareholder may be important to ensure strong SOE listings’ effect on capital markets monopolies, which have every incentive to corporate governance and minority shareholder operational and stock performance, governments development cannot be judged in isolation from restrict output and charge excessive prices. frameworks, the use of lock-up periods for should seek a diversified investor base that its impact on the broader economy. The following majority owners may be a good alternative includes retail and institutional investors, with an section lists the key drivers of impact important solution, as they create strong incentives interest in active trading. Where government’s Target an ownership structure that aligns to create a positive effect (or at the minimum, no for controlling shareholders to improve firm main objective is to raise fiscal income, minority with your divestment objectives negative effect) on the key economic variables performance (see the example of China, Box 7). sales through public offerings are a popular that were investigated as part of this report. Depending on the political and economic strategy with foreign investors as one of the objectives, governments may want to choose Governments whose main objective is to develop main targets. As shown above, foreign investors’ different ownership structures for SOE listings, local capital markets should aim to sell a large participation usually creates additional price Define your role as a strategic investor carefully evaluating some key trade-offs. If enough free-float (>15 percent). As mentioned pressure that allows governments to maximize Where governments continue to hold an interest a government’s main objective is to improve above, capital markets require size. Sufficient the proceeds from the sale. in a listed SOE, it is of utmost importance that a SOEs performance, privatization and a free-float is required to ensure sufficient liquidity they define how they plan to exercise their partnership with a strategic investor may be the of the SOE stock and create spill-over effects new role as a strategic investor. The better a preferred option. Although governments can government can communicate its intentions improve a company’s efficiency through minority (and act in accordance with them), the better it sales, privatization usually achieves significantly will be received by the market — which often better results. Especially where governments also translates into better pricing. aim to restructure poorly performing SOEs but lack the capacity to execute restructurings, Box 16. Building local expertise — the potential public resistance for selling out If well executed, the role of a government public offerings should be combined with trade example of Brazil’s investor consortium to foreign investors. as a strategic investor can bring various sales that aim to introduce a strong, controlling opportunities, with government benefiting from shareholder. Foreign strategic investors can be An interesting feature of the privatization For instance, the Brazilian government the wealth created by the SOEs and providing good partners in such an endeavor, providing process in Brazil was that around 50 percent sold 42 percent of Vale, Brazil’s largest mining continued support to those SOEs that require SOEs with new technology and know-how. But, of divestment auctions involved “mixed company, to a consortium of investors in it. In these cases government’s shareholder wherever possible, governments should seek consortia” controlled by domestic private 1997. The consortium included BNDES, the objectives should be well organized and domestic investor participation to encourage groups, foreign investors, and state-related Japanese group Mitsui, the Brazilian banking focused on value creation and performance the development of a local business community entities such as BNDES and SOE pension group Bradesco, and a host of SOE pension management. This also requires that according that is incentivized to invest in the country’s funds. This allowed Brazilian SOEs to benefit funds such as Previ (from Banco do Brasil) to the proportion of the government’s stake, growth and development — a solution that from technology and knowledge transfers and Petros (from Petrobras). In the first year board directors should continue to be appointed aims to balance short versus long-term benefits from foreign investors, while developing after the sale, Vale achieved a profit growth by the General Assembly, on a proposal from and create foreign-domestic investor consortia the local investor base and reducing of 46 percent. the government, as is the case for private like those created in Brazil (see Box 16). When shareholders. Broader government goals should governments decide to privatize an SOE, be achieved through regulation and not directly they should refrain from including restrictive through SOE interference. conditions — such as golden shares or restrictions in company charters — as these increase uncertainty and restrain the privatized Address market inefficiencies through sector firm’s commercial freedom. reforms pre-divestment SOE listings are no silver bullet but require Additional conditions need to be in place for SOE a strong sector framework for their benefits listings to have the maximum impact on firm to fully develop. Listings can improve firm performance: i) a robust corporate governance performance and potentially the provision of framework that is well-enforced and ii) adequate public goods and services. However, the best protection of minority shareholder rights. As our results are achieved when listings are preceded analysis has shown, SOE listings rarely have a by sector reforms that address fundamental significant impact on the majority shareholders. inefficiencies, such as limited market competition or underpricing of goods and Instead, SOE listing impact is largely services. The last 30 years of divestments have determined by minority shareholders and the demonstrated that such reforms should take enforcement of good corporate governance. place prior to ownership changes. Otherwise Enforcement of corporate governance can reduce the risk of entrenchment and provide an reforms are likely to stagnate due to the vested additional layer of monitoring and supervision © The World Bank | Oliver Wyman | The Goverment of the Grand Duchy of Luxembourg | ASEA (African Stock Exchange Association) 69 © The World Bank | Oliver Wyman | The Goverment of the Grand Duchy of Luxembourg | ASEA (African Stock Exchange Association) 70 CONCLUSION and control, boards and management teams conditions for success and drivers of impact often remain the same — and with them their that are required to unlock the full scope of (sometimes antiquated) technologies, know- SOE listing benefits. SOE listings are more how and management techniques. Where SOE complex processes — when compared to other listings have not been combined with trade sales divestment approaches — and require a certain to strategic investors or other restructuring enabling environment. At a minimum, strong This report investigated the impact of SOE We found very few examples in which SOE measures, they have often seen no or only a political institutions and a well-functioning listings on capital markets development in listings have created a negative impact on weak performance improvement. On the other capital markets infrastructure must be in EMDEs over the past 30 years. Comparing the capital markets development. In all cases, hand, where governments have chosen to place to avoid negative effects. Ideally a range findings of the empirical literature — which the root cause was a weak capital markets restructure their companies as part of the SOE of additional drivers are in place, including is largely based on advanced economies — infrastructure. There is a downside risk of listing process, the results have mostly been a large domestic institutional investor base, with our case study analysis of 14 EMDEs, listing SOEs too early or under the wrong positive — examples include Kenya’s Safaricom, large pipeline of public and private companies, we find that the relationship between SOE conditions but, to our knowledge, it seems Romania’s BCR or Argentina’s YPF (before its re- a strong sector framework that introduces listings and capital markets development relatively small. nationalization). market competition (wherever possible) and is more complicated than suggested by the a well-diversified economy that provides empirical literature. Beyond SOE listings’ impact on capital markets In summary, the experience of SOE listings alternative employment opportunities. development, we find that SOE listings create in EMDEs is more mixed when compared On the positive side, many EMDEs successfully positive results for a government’s fiscal to advanced economies. However, the Having said that, this does not mean that SOE listed a large number of their SOEs at their local revenue and wealth distribution. Across our positive benefits from listings, especially listings should not be pursued by EMDEs where stock exchanges, often oversubscribed by a case study countries, most governments where governments listed their SOEs at the the pre-conditions remain underdeveloped. large percentage and with sufficient liquidity have capitalized well on their SOE listings. For right time and under the right conditions, EMDEs should rather aim to strengthen their in the secondary market. Due to the large size example, Poland raised over US$ 28 billion poses a question: Why have not more enabling environment. Many of these reforms and value of many SOEs, a single listing can between 1990 and 2019, followed by Brazil with EMDE governments chosen to divest their will form a crucial part of any country’s significantly increase an exchange’s market US$ 20 billion and Taiwan with US$ 18 billion. SOEs through public offerings at the local economic development. There are simply no capitalization — in the case of Singapore and In relative terms, SOE listings have provided stock exchange? quick fixes. Once the pre-conditions are met and South Korea by up to 170 percent. SOE listings up to one percent of GDP annually. In addition, developed, SOE listings can offer an attractive have attracted a broad shareholder base — SOE listings have allowed governments to earn For many EMDEs SOE listings pose a dilemma. divestment method with long-term positive sometimes with over one million investors, a continued income from dividend payments On the one hand, they stand to benefit effects on local capital markets. We conclude many of them first-time retail investors. SOE and in some cases, where listings have been greatly from SOE listings. On the other, most that listings should be considered by EMDE listings have also provided governments with combined with sector reforms, governments EMDEs still need to fully implement the governments as viable option to divest SOEs. a great opportunity to draw foreign investors were able to reduce their financial support to into the local economy. For example, SOEs SOEs (sometimes up to one percent of GDP). constitute about 60 percent of the MSCI Moreover, SOE listings are the only divestment emerging market index in energy and close to method that allows the ordinary citizen to 40 percent in the financial sector. participate in the country’s wealth creation. As a result they can reduce opposition to On the other hand, the positive effects on divestures as at least some of the “family capital markets development have often silver” stays within the family. been short-lived and rarely sustained over the medium to long term. Where SOE listings SOE listings’ benefits for capital markets created long-term benefits for capital markets development, fiscal revenue and wealth development, certain conditions had been in creation can often be achieved through place that created a positive signal to private the sale of minority interests. SOE listings companies and encouraged them to float. allow for a gradual divestment, whereby the Based on our analysis, the conditions include government can choose to keep or sell its (1) a large SOE listing pipeline, (2) a domestic controlling interest. This has proven to be a institutional investor base, (3) a certain size good alternative to privatization, especially in of the economy and (4) a minimum level of countries where past privatization attempts macroeconomic stability, including stable low have created considerable public opposition. local interest rates. The effect of SOE listings on firm performance SOE listings’ impact on the development of the seems relatively weak unless listing is retail and foreign investor base is likely to be combined with restructuring measures, sustainable only where measures to strengthen e.g., the sale of an SOE’s controlling interest market confidence are implemented and to a strategic investor. 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Americas, May, Puebla, Mexico. 658. doi:10.1016/j.jfineco.2012.12.007. © The World Bank | Oliver Wyman | The Goverment of the Grand Duchy of Luxembourg | ASEA (African Stock Exchange Association) 73 © The World Bank | Oliver Wyman | The Goverment of the Grand Duchy of Luxembourg | ASEA (African Stock Exchange Association) 74 ANNEX OECD (2019): www.oecd.org/corporate/Owners- Sigma-Mugan, C. & Yuece, A. (2003) Privatization of-the-Worlds-Listed-Companies.pdf in Emerging Markets: The Case of Turkey, Emerging Markets Finance and Trade, 39:5, 83- Omran, M. (2007). Privatization, state 110, doi: 10.1080/1540496X.2003.11052550. ownership, and bank performance in Egypt. World Development, 35(4), pp.714-733. Subrahmanyam, A., & Titman, S. (1999). The Going-Public Decision and the Development Pagano, M. (1993). Financial markets and of Financial Markets. The Journal of Finance, Selection of case study countries growth. European Economic Review, 37(2-3), 613- 54(3), 1045-1082.doi:10.1111/0022-1082.00136. 622. doi:10.1016/0014-2921(93)90051-b. Svejnar, J. (2002). Transition Economies: Country High level rationale and description Perotti, E. (1995). Credible Privatization. American Performance and Challenges. Journal Argentina Argentina had a series of listings with mixed success. The government Economic Review, 85(4), 847-859. of Economic Perspectives, 16(1), initiated a vast privatization process in the 1990s, aimed at restructuring Market Cap: $40 billion 3-28. doi:10.1257/0895330027058. the economy and improving the overall state of the SOE sector (67 firms MSCI: Emerging Markets Index privatized in less than 6 years). However, the currency, fiscal and Perotti, E. C., & Biais, B. (2002). Machiavellian Privatization. SSRN Electronic Journal doi:10.2139/ Sule Alan (2012): “Do disaster expectations banking crisis in 2001 led to measures to reinforce the role of the state ssrn.254276. explain household portfolios?” Quantitative in the economy and renationalize a number of SOEs. A second wave of nationalizations was started in the economic crisis of 2012 when, among Economics, Econometric Society, vol. 3(1), pages others, Argentina partially renationalized the oil company YPF. Qian Sun, Wilson H.S Tong (2003): China share 1-28, 03. issue privatization: the extent of its success, Brazil A series of privatizations accompanied by a pension reform 15 years Journal of Financial Economics, Volume 70, Swaminathan S. A. Aiyar (2004). Disinvestment ago increased local investor participation, the BNDES (development Market Cap: $1,180 billion Issue 2. as Soap Opera, February 29, 2004, The Times bank) has played a key role in establishing a debt funding source for of India. MSCI: Emerging Markets Index listed SOEs. Roland, G. (2001). Ten Years after. Transition and Colombia Partial listings of the oil and gas company and utility companies and Economics. IMF Staff Papers, 48, 29-52. Verbrugge, J.A., Megginson, W.L., Owens, pension reform supported local investor demand and high inward Market Cap: $130 billion W.L., 1999. State ownership and the financial FDI-flows. Colombia was able to carry out privatization initiatives in a Sader, F. (1995). Privatizing Public Enterprises performance of privatized banks: An empirical MSCI: Emerging Markets Index systematic and orderly fashion, facilitated by learnings from previous and Foreign Investment in Developing analysis. Paper presented at World Bank/ privatization efforts in the region. Countries, 1988-93. Foreign Investment Advisory Federal Reserve Bank of Dallas Conference on Egypt Egypt launched a program to improve economic conditions in the early Service. doi:10.1596/0-8213-3362-3. Bank Privatization, Washington, DC, March 1999. 1990s with privatization as one of the main pillars. Some 382 SOEs Market Cap: $44 billion were fully or partially privatized as part of the program. After 2011 the Savic, Abbosh, O., & Moore, M. (2018, July 31). MSCI: Emerging Markets Index privatization program was suspended and led to the annulment of the Databases How Likely Is Your Industry to Be Disrupted? privatization of some companies. The privatization efforts were revived This 2×2 Matrix Will Tell You. Retrieved July 17, S&P Capital IQ; Refinitiv/Datastream; Dealogic; in 2015 and 2018 after announcement of the government to list 23 SOEs, 2020, from hbr.org/2018/01/how- likely-is-your- Economist Intelligence Unit; World Bank; however the initiatives were delayed. Privatization activities picked up industry-to-be-disrupted-this-2x2-matrix-will- World Economic Forum and World Federation again in 2019, with the floating of a 4,5 percent stake in the tobacco tell-you of Exchanges. producer, Eastern CO SAE. WAEMU Initiated privatization in the 1990s, the process was disrupted during the Market Cap BRVM: $8 billion political crisis between 2002-2011, but in recent years there have been several SOE listings, e.g., NSIA Banque Cote d’Ivoire in 2017 and the food MSCI: Emerging Markets Index processing company Sucrivoire SA in 2016. Morocco Privatization initiatives in Morocco were initiated by the government in Market Cap: $65 billion the early 1990s. Morocco has been active in privatizing SOEs in recent years and floated an additional 8 percent stake in Maroc Telecom in 2019 MSCI: Emerging Markets Index (starting with an IPO in 2004, where 15 percent of the company was offered to the public). Nigeria Since 1993 SOE divestment concerned 34 companies and in 2005 alone, Market Cap: $44 billion the privatization agency privatized eight enterprises. Over recent years few SOEs have been privatized through listing, other methods MSCI: Emerging Markets Index of privatization were preferred (e.g., direct investor sales, asset sales, concessions). This year for example, Skyway Aviation Handling Company Plc was listed on the Nigerian stock exchange, after being privatized and sold to the SIFAX Group in 2009. © The World Bank | Oliver Wyman | The Goverment of the Grand Duchy of Luxembourg | ASEA (African Stock Exchange Association) 75 © The World Bank | Oliver Wyman | The Goverment of the Grand Duchy of Luxembourg | ASEA (African Stock Exchange Association) 76 Poland In the 1990s, Poland positioned itself as leading transitionary economies Distribution of SOE listings across case study countries Market Cap: $150 billion away from state-led markets through a wave of consistent privatizations (mainly through IPOs), and have seen many and large privatizations over Table B. Value of SOE listings1 across Case Study Countries ($US billion, 1990-2019) MSCI: Emerging Markets Index the last 30 years. Romania A range of listings over 15 years improving liquidity on the Bucharest 16,000 Market Cap: $33 billion exchange, e.g., listing of Romgaz on the Bucharest Stock Exchange and the London Stock Exchange in 2013. The listings subsequently attracted MSCI: Emerging Markets Index private companies into the market. 719 Singapore The formal privatization program in Singapore was initiated between 1,079 1985-1987. Unlike many other countries, Singapore privatized SOEs after 0 Market Cap: $700 billions significant restructuring and investment when the companies reached competitive viability as regional champions, when the rationale that 12,000 state ownership was no longer required. Large listing of ~30% of Insurance firm PZU SA at a South Africa Eskom has been, and is, a case of a heated privatization debate, value of US$ 2.7 billion Market Cap: $1,050 billion discussion of privatizing other less strategic SOEs continue — e.g., partial 6,366 or full privatization of the struggling airline SAA. South Africa has not 7,649 MSCI: Emerging Markets Index been particularly active in listing SOEs over the past 20 years. Apart from the IPO of Telkom SA in 2003, floating a ~27 percent stake, 8,000 only minor follow-on issuances of existing privatizations have occurred. 0 167 299 South Korea Privatization was the main instrument for increasing SOE efficiency 284 during the 1980s and 1990s. Although privatization achieved meaningful 59 0 1,812 Market Cap: $1,480 billion efficiency improvements, public resistance to selling state shares to MSCI: Emerging Markets Index private parties has grown. As a result, in recent years, privatization has 0 200 164 0 0 3,077 1,861 not been considered a viable option in South Korea (latest listing of SOE 2,743 0 0 648 0 97 in 2014). 4,000 0 2,832 450 0 0 0 958 213 0 0 25 3,768 204 0 715 Taiwan Recent history of a large number of SOE listings, including privatization 0 2,508 01,144 5,439 0 230 of Chunghwa Telecom in 2000. Privatisation in Taiwan came in four 2,5510 98 0 Market Cap: $1,220 billion 347 553 4,337 1900 217 0 2,343 1,481 0 waves and categories 1) Industrial firms (1989~96), 2) Financial 0 300 0 0 50 3,719 0 1,220 0 1,918 0 MSCI: Emerging Markets Index institutions (1998~99), 3) Financially troubled SOEs (1999~2004), 4) Utility 125 5 577 0 0 0 873,096 2,654 0 94 0 0 626 533 968 8 2,140 0 2,376 1,922 0 companies (yet to be privatized). 0 1,230 636 0 1,072 1,122 0 445 604 0 0 62 0 328 649 1,056 0 807 0 0 852 670 Turkey Turkey has undertaken many privatizations. The shares of the national 0 360 0 269 0 116 27912 0 0 0 40 0 119 0 355 0 0 0 407 83 0 418 0 0 209 0 0 0 0 0 0 0 0 0 0 436 0 633 0 195 64 0 0 0 telecommunications company, a petrochemical firm and Halkbank, are 1990 1995 2000 2005 2010 2015 2020 Market Cap: $180 billion examples of large companies offered publicly over the last couple of MSCI: Emerging Markets Index years. In Turkey, most of the privatization transactions have been trade sales of SOEs in the utilities sectors. Some stock market offerings have Argentina Brazil Colombia WAEMU* Egypt Morocco Nigeria Poland also occurred. Romania Singapore South Africa South Korea Taiwan Turkey 1. Privatization listings include privatized IPO and follow-on deals at deal value * The focus is on Cote d’Ivoire Note: Poland, Singapore, South Korea and Taiwan feature as high-income economies in the World Bank’s current taxonomy (2019) Source: Dealogic database © The World Bank | Oliver Wyman | The Goverment of the Grand Duchy of Luxembourg | ASEA (African Stock Exchange Association) 77 © The World Bank | Oliver Wyman | The Goverment of the Grand Duchy of Luxembourg | ASEA (African Stock Exchange Association) 78 The World Bank comprises the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA). The organization‘s mission is to end extreme poverty and promote shared prosperity in a sustainable way. Oliver Wyman is a global leader in management consulting that combines deep industry knowledge with specialized expertise in strategy, operations, risk management, and organization transformation. 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