STATE HOLDING COMPANIES AND PUBLIC ENTERPRISES IN TRANSITION Also by Anjali Kumar INDIA'S MANUFACTURED EXPORTS, 1957-1980 State Holding Companies and Public Enterprises in Transition Anjali Kumar Senior Economist World Bank J50th YEAR M St. Martin's Press The findings, interpretations and conclusions expressed in this study are the results of research supported by the World Bank, but they are entirely those of the author and should not be attributed in any manner to the World Bank, to its affiliated organizations, or to members of its Board of Executive Directors or the countries they represent. © The World Bank 1993 Softcover reprint of the hardcover 1st edition 1993 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No paragraph of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, 90 Tottenham Court Road, London WI P 9HE. Any person who does any unauthorised act in relation to this publication may be liable to criminal prosecution and civil claims for damages. First published in Great Britain 1993 by THE MACMILLAN PRESS LTD Houndmills, Basingstoke, Hampshire RG21 2XS and London Companies and representatives throughout the world A catalogue record for this book is available from the British Library. ISBN 978-1-349-23012-9 ISBN 978-1-349-23010-5 (eBook) DOI 10.1007/978-1-349-23010-5 First published in the United States of America 1993 by Scholarly and Reference Division, ST. MARTIN'S PRESS, INC., 175 Fifth Avenue, New York, N.Y. 10010 ISBN 978-0-312-10172-5 Library of Congress Cataloging-in-Publication Data Kumar, Anjali. State holding companies and public enterprises in transition I Anjali Kumar. p. em. Includes bibliographical references and index. ISBN 978-0-312-10172-5 I. Government holding companies-Case studies. 2. Government business enterprises-Case studies. I. Title. HD3850,K788 1993 338.8'6--<lc20 93-27752 CIP TABLE OF CONTENTS Preface ix Acknowledgements xi Abbreviations xiii Currency Equivalents xiv Chapter 1 Public Enterprise Management Through State Holding Companies 1 1.1 The State Holding Company: A Rationale for its Examination 1 1.2 The Holding Company as a Managerial Form 8 1.3 A Framework for Comparative Analyses 17 Chapter 2 Empirical Experience: An Overview 35 2.1 Forms and Models of State Holding Companies 35 2.2 Vertical Structure and Portfolio Distribution 40 2.3 Italy, Egypt and Algeria: A Preview 48 2.4 Scope and Data Sources 49 Chapter 3 Italy: IRI and Others 60 3.1 State Holding Companies in Italy: Origins and Current Role 60 3.2 Vertical Links 70 3.3 Financial Practices and Links with the Financial System 76 3.4 Shareholding Structure, Share Transfer and Privatization 81 3.5 Restructuring and Redeployment of Labor 90 3.6 Government Financial Obligations and Transfers 99 3.7 A Summary 105 Chapter 4 Egypt: Successive Holding Structures 110 4.1 Origins, Changes and Continuity lJO v 4.2 The Legal Framework and Policy Environment 112 4.3 Public Enterprise Performance 117 4.4 Vertical Structure, Share Distribution 121 4.5 Financial Practices and Links with the Financial System 130 4.6 Restructuring and Privatization 137 4.7 Governmental Obligations and Government Assistance 141 4.8 An Evaluation 147 Chapter 5 Algeria: Participating Funds 151 5.1 Origins of Public Enterprise Reform 151 5.2 Parallel Changes in Policy 157 5.3 Vertical Links 161 5.4 Portfolio Distribution and Share Sales 166 5.5 Current Financial Situation and Links to the Financial System 172 5.6 Privatization and Restructuring 180 5.7 Government Assistance and Obligations to the Government 185 5.8 An Assessment 188 Chapter6 East Europe: New Holding Institutions 192 6.1 Relevant Parallels 192 6.2 Majority Holding Companies: Restructuring and Privatization 195 6.3 Minority Holding Companies: Investment Funds 207 6.4 Conclusions 224 Chapter 7 A Synthesis 227 7.1 Theoretical Hypotheses 227 7.2 Principal Findings 231 7.3 The Design of a State Holding Institution 238 vi Appendix Notes on Holding Companies in Developed and Developing Countries 250 Al. Developing Countries: Public Enterprise Management and Gradualist Reform 250 A2. Developed Countries: Rescue and Restructuring 259 Appendix Tables 262 Bibliography 271 Index 288 vii For Indira viii PREFACE Large state-owned enterprises pose a particular problem in the adjustment process of countries attempting to move away from government controls towards more liberal economic environments. While their performance in many instances has been demonstrated to be relatively inefficient, the solutions to address these problems are less obvious. Even if privatization is accepted as a long term solution, as appears increasingly the case today, not all countries are in a position to move rapidly towards this goal. Constraints arise, sometimes for reasons of political acceptability but also because of practical difficulties due to the lack of concomitant conditions required for undertaking large-scale privatizations. It is now being recognized that the transition process for state enterprises in centrally planned economies may be long drawn and may in some cases go through multiple phases. Faced with this situation, some countries are groping towards more nuanced solutions towards the issue of public enterprise reform, leading to an exploration of intermediate or interim institutional fonns. In some cases, these may combine elements of both ownership and regulatory change. One such experiment, which has been adopted by many developed, developing and transforming socialist economies is the establishment of state holding companies. This institution is widespread and new forms of it are continuously appearing. In a state holding company, the government attempts to separate its ownership and management functions, distancing the enterprises from the state and permitting them greater operational freedom. In transitional economies, such holding companies or funds have sometimes had additional roles; undertaking the restructuring of the enterprises below them, stimulating the capital market through share trade and increasing the returns on shareholdings in their enterprises through active portfolio management. Despite its widespread existence the state holding company has received relatively little attention in the literature. The present study first discusses the state holding company as a managerial form and offers a framework for an analysis of the effectiveness of such institutions as interim organizations in a process of transition. The framework can be adapted to a variety of national environment. The results of an empirical examination of state holding companies in different countries, undertaken within this framework, are presented in this study. Three countries are selected for detailed examination; Italy, Egypt and Algeria. The sample represents countries with different economic environments, at different stages of ix