A FALSE PROBLEM: Privatization by listing on the stock exchange: yes or no?
- Written by Laurentiu Rosoiu
The recent listing of two of the most important companies in the energy field in Romania (Romgaz and Electrica) on the Bucharest and London stock exchanges have given birth to countless controversies at home; the decision was fought with arguments rooted in the economic field, such as the one saying “the price is too low as compared to the real value of the company”, or others politically-motivated as the one stating that “the state is going to be weaker and poorer if it sells its wealth.” The voices pleading against the privatization through listing on the stock exchange use arguments criticizing (going as far as demonizing the idea) the fact that foreign investors are to become shareholders, investors aiming at, isn’t it so, despoiling Romania.
Besides the elements making the basis for such logical developments, which may even have some ideological foundation (one of ‘interventionist’ nature – to be put forward by the ones supporting state intervention and its role when having an important share of the economy) – a pragmatic approach is not only needed, but necessary. Such an approach should have as starting point the free movement of market mechanisms, be it simplistic, but it could dissemble, bit by bit, the arguments brought by those criticizing privatizations in general and the listing on the stock exchange in particular.
For example, the criticism regarding the so-called low price cashed in through the Initial Public Offering (IPO) mentioned above could be easily contradicted. No matter how low or high the value of some asset may be... its value could not be different from the one resulting from offer and demand; meaning the one resulting from the mechanism as transparent as possible on the market!
A suggestive example. Supposing the owner of some real estate is valuating his asset to EUR 10 M... but no buyer is offering more than EUR 5 M, then it is obvious the real value cannot exceed the best of the buying level (i.e. EUR 5 M in this case). In this context, Romanians may rejoice in vain the fact that they own ‘mills and factories’ worth EUR thousands of billions if they can cash only a few lei for them. As far as the privatization method is concerned – the listing on the stock exchange instead of the classical ‘direct negotiation’ – one should say that no other method of selling assets (whichever it may be, an energy company of a real estate asset) than the bourse auctioning can offer guarantees that the final price is as close as possible to the market realities. In other words, it’s only the competition between buyers and nothing else that can lead to the ‘correct price’. The best framework – the functioning one, not utopian – needed for covering real and transparent ‘competition’ between competitors is the stock exchange one.
Even more important than the fact that the stock exchange is offering the best negotiating framework for setting the price, as a company enters a regulated market it has to offer a huge surplus of transparency to its shareholders mainly, but also to the general public.
Transparency is coming not only from the reporting obligations set by the stock exchange. This transparency is given mainly by the ‘overseeing’ performed by the other shareholders on the decisions taken by the company representatives (we are speaking, maybe, of the most beneficial effect of other shareholders joining the company); the shareholders are playing the part of ‘guard dog’ against a public company (against the state itself – as significant or majority shareholder) whose management could adopt arbitrary or disadvantageous decisions (due to lack of knowledge or due to ill will).
Apparently the ‘overseeing’ part played by the shareholders could seem insignificant. At least for the general public! However it is useful to look at several examples such as Oltchim, CFR, Romanian Post, Romanian Lottery – the bad decisions of the management (not only contracts for goods and services acquired for exorbitant prices or poor decisions regarding investments and/or taking part to fake auctions that led to failing to conclude contracts and losing sources of important incomes) have concluded with disadvantages for the companies, leading them to bankruptcy or very close to this situation.
Maybe the best example to picture the situation of a company before and after, in regard to the state influence, is Petrom; a company which, only by cutting off the money leakages, has transformed after privatization, within one year, from a company registering huge losses to a company registering spectacular profits. The Romanian state enjoys these profits along with the main shareholder and the other shareholders (natural persons, investment funds, pension funds, etc). These profits are in fact clean and real incomes to the budget. However, by far the most beneficial effect of privatization and of the listing is the opening towards foreign investors, valid in general and for the two companies from the Romanian energy sector in particular – listed on the Bucharest and London stock exchanges. This means the domestic energy sector is opening towards the capital inflows. According to official estimates the domestic energy field as a whole is in need of some EUR 4 billion per year during the next ten years. This is an effort neither the state, nor the companies in the field are able to assume. One should not ignore the fact that such an opening from the energy field towards foreign capital is building sound premises for the opening of the entire Romanian economy to money inflows able to stimulate it. In the end, beyond the issues mentioned above, the most important aspect of this (false!) problem – the privatization of the state energy companies by listing them on the stock exchange (Bucharest and/or London) – is that Romania stands the chance of becoming the leader (or at least one of the leaders) of this industry in the region, taking into consideration its natural and human resources, its geographical positioning and the know-how it has in the energy sector. This is a real chance it cannot afford to miss... in order to achieve it, it needs only a stimulating legal framework, opened towards foreign capital and foreign know-how and, above all, a functional market mechanism influenced as least as possible by the arbitrary state interventions. The first step on this way is bringing the companies in this field on the stock exchange!