ISSN 2443-8014 (online) State-Owned Enterprises in the EU: Lessons Learnt and Ways Forward in a Post-Crisis Context INSTITUTIONAL PAPER 031 | JULY 2016 EUROPEAN ECONOMY Economic and Financial Affairs European Economy Institutional Papers are important reports and communications from the European Commission to the Council of the European Union and the European Parliament on the economy and economic developments. LEGAL NOTICE Neither the European Commission nor any person acting on its behalf may be held responsible for the use which may be made of the information contained in this publication, or for any errors which, despite careful preparation and checking, may appear. This paper exists in English only and can be downloaded from http://ec.europa.eu/economy_finance/publications/. Europe Direct is a service to help you find answers to your questions about the European Union. 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European Commission Directorate-General for Economic and Financial Affairs State-Owned Enterprises in the EU: Lessons Learnt and Ways Forward in a Post-Crisis Context EUROPEAN ECONOMY Institutional Paper 031 ABBREVIATIONS AND SYMBOLS USED COUNTRIES AT Austria BE Belgium BG Bulgaria CY Cyprus CZ Czech Republic DE Germany DK Denmark EE Estonia EL Greece ES Spain FI Finland FR France HR Croatia HU Hungary IE Ireland IT Italy LT Lithuania LU Luxembourg LV Latvia MT Malta NL Netherlands PL Poland PT Portugal RO Romania SE Sweden SI Slovenia iii SK Slovakia UK United Kingdom OTHERS CEE Central Eastern European countries CEO Chief Executive Officer CSR Country Specific Recommendation EA Equity-to-Assets ratio EBITDA Earnings before interest, taxes, depreciation and amortization EU European Union EUR Euro GDP Gross Domestic Product IMF International Monetary Fund IPO Initial Public Offering MOE Minority-SOE NACE Statistical Classification of Economic Activities in the European Community NFC Non-financial corporations OECD Organisation for Economic Co-operation and Development OPEX Operating Expenses PSO Public Service Obligation ROE Return on Equity SEK Swedish Krona SOE State Owned Enterprise SPO Secondary Public Offering TFP Total Factor Productivity USD US Dollar iv ACKNOWLEDGEMENTS This report was prepared in the Directorate-General for Economic and Financial Affairs under the direction of Marco Buti, Director-General, and Antonio de Lecea, Director of the Directorate for Investment, growth and structural reforms. The report is the result of the effort of the SOE network of the Directorate-General for Economic and Financial Affairs managed by Anne Bucher. Mirco Tomasi and Martijn Brons coordinated the report under the guidance of Anne Bucher and Emmanuelle Maincent. The main contributors to Part I were Paul Arnoldus, Martijn Brons, Erik Canton, Peter Pontuch, Dominique Simonis, Mirco Tomasi and Ingrid Toming. Comments from the SOE network are gratefully acknowledged. The authors of Part II, Chapter 1 were Martijn Brons and Mirco Tomasi. Statistical support was provided by Yves Bouquiaux. The authors of Part II, Chapter 2 were Jean-Charles Bricongne, Erik Canton and Peter Pontuch. Research assistance was provided by Massimiliano Rizzati. These two chapters were presented in the form of analytical papers at the DG ECFIN Workshop: "SOEs reform – lessons learnt from the crisis and ways forward" on 24 November, 2015. The feedback received during the workshop, including detailed comments by Prof. Massimo Florio of the University of Milan and Mariana Iootty de Paiva Dias of the World Bank is gratefully acknowledged. The main contributors to Part III were Milan Lisicky, Klara Stovicek, Svetoslava Georgieva, Emiel Afman, Vasileios Thomas Karantounias, Dino Pinelli, Antonino Barbera Mazzola, Pedro Guedes de Campos, Maria Gerhardt, Jessica Larsson, Hanna Aspegren, Norbert Gaal, Maarten Masselink, Tobias Ketterer, Anca Dana Dragu, Helena Marrez and Francisco Barros Castro. The report has benefited from useful comments and suggestions from colleagues in Directorate-General for Transport and Mobility, the members of the Economic and Policy Committee Working Group on Climate Change and Energy and the members of the Economic and Policy Committee. Editorial assistance was provided by Vittorio Gargaro. Comments on the report would be gratefully received and should be sent to: Directorate-General for Economic and Financial Affairs Unit B4: Impact of EU policies on national economies European Commission BE-1049 Brussels or by e-mail to [email protected]. v CONTENTS Executive Summary 1 Part I: State-owned enterprises in the EU: an overview 3 Overview 5 1. The relevance and performance of state-owned enterprises in the european economy 6 1.1. Role and objectives of state-owned enterprises 6 1.2. Definition of state-owned enterprises 6 1.3. Importance of state-owned enterprises 7 1.4. Evolution of performance in selected network sectors (energy and rail) 8 1.5. Evolution of performance of firms in selected New Member States 9 2. State-owned enterprises and fiscal implications 11 2.1. The links between state-owned enterprises and public finances 11 2.2. Contingent liabilities associated with state-owned enterprises 13 3. Reforming state-owned enterprises 17 3.1. Reforming state-owned enterprises 17 3.2. Economic rationale of the performances of state-owned enterprises 17 3.3. Modalities of the reforms of state-owned enterprises 18 3.4. Intrinsic difficulties of the reforms of state-owned enterprises' reforms 21 4. Conclusions 23 Part II: Economic performance of state-owned enterprises: an empirical analysis in selected sectors and Member States 25 Overview 27 1. Performance of state-owned enterprises in the energy and railway sectors 28 1.1. Recent evolutions in energy and rail 28 1.2. Literature review: theoretical and empirical findings on the performances of state-owned enterprises 31 1.3. Empirical analysis of firm ownership and financial performance 32 1.4. Conclusions 40 A.1. Acronyms 42 A.2. Econometric results 43 2. Performance of state-owned enterprises in selected new Member States 47 2.1. Introduction 47 2.2. Data 48 2.3. Ownership and economic performance of firms in selected New Member States 49 2.4. Allocative efficiency and state ownership 55 2.5. Relative impact of privatisations on performance 56 2.6. Conclusions 58 A.3. Econometric results 60 vii Part III: Selected country profiles 67 Overview 69 1. Croatia 70 1.1. Background 70 1.2. Main issues identified 70 1.3. Reform efforts and remaining challenges 71 2. Italy 73 2.1. Background 73 2.2. Main issues identified 73 2.3. Reform efforts and outcome 74 2.4. Remaining challenges 75 3. Lithuania 76 3.1. Background 76 3.2. Main issues identified 77 3.3. Reform efforts and outcome 77 3.4. Remaining challenges 78 4. The Netherlands 79 4.1. Background 79 4.2. Main issues identified 79 4.3. Reform efforts and remaining challenges 80 5. Portugal 81 5.1. Background 81 5.2. Main issues identified 81 5.3. Reform efforts and outcome 82 5.4. Remaining challenges 84 6. Romania 85 6.1. Background 85 6.2. Main issues identified 85 6.3. Reform efforts and outcome 85 6.4. Remaining challenges 87 7. Sweden 88 7.1. Background and main issues identified 88 7.2. Reform efforts and outcome 89 7.3. Remaining challenges 89 8. Slovenia 91 8.1. Background 91 8.2. Main issues identified 91 8.3. Reform efforts and outcome 92 8.4. Remaining challenges 94 9. United Kingdom 95 9.1. Background and main issues identified 95 9.2. Reform efforts and outcome 95 9.3. Remaining challenges 96 References 97 viii LIST OF TABLES II.A1.1. Sector acronyms 42 II.A2.1. Estimation output for the electricity subsectors 43 II.A2.2. Estimation output for the gas subsectors and energy conglomerates 44 II.A2.3. Estimation output for the rail subsectors and conglomerates 45 II.A2.4. Overview of sample size for the different estimations 46 II.2.1. Dependent variable: ln(TFP), whole period 53 II.2.2. Dependent variable: return on equity (winsorized), whole period 54 II.2.3. AE and SOE 56 II.A3.1. Sectors included in the estimations 60 II.A3.2. Return on equity and state ownership (dep. variable: ROE) 61 II.A3.3. Debt and state ownership (dep. variable: Debt/EBITDA) 62 II.A3.4. TFP and state ownership (dep. variable: log TFP) 63 II.A3.5. Labour productivity and state ownership (dep. variable: log labour productivity) 64 II.A3.6. Allocative efficiency and state ownership (dep. variable: sector allocative efficiency) 65 III.3.1. Key figures (2014) 76 III.7.1. Divestments and dividends of state-owned companies (2007-2013) 88 LIST OF GRAPHS I.1.1. OECD Scope of SOEs Index in EU Member States 7 I.1.2. Market value of central SOEs, % of GDP 8 I.1.3. Employment in central SOEs, % of total employment 8 I.1.4. Financial performance of firms in the energy and rail sectors 9 I.1.5. Return on Equity, SOEs and Private firms 10 I.2.1. Government's participation in the capital of corporations, % of GDP (2014 or latest) 12 I.2.2. Liabilities of Public Corporations by controlling Government level, 2014 or latest, % of GDP 14 I.3.1. Direct control over business enterprise index 17 II.1.1.