Now that Mr. Junichiro Koizumi has been elected Prime Minister on his campaign to “Change Japan,” one issue that should not be overlooked is how Japan approaches its government-run special corporate entities, or “SPEs.”
In this series of articles, I have provided figures and examples of foreign and domestic successes in privatization. This installment will explore only one of the many aspects of this process — the economic side. More precisely, I will detail the economic spark that offering stock in these entities provides and how the general public can reap the rewards.
By way of introduction, I wish to state that the initial premise of this article is that it is best for the Japanese economy and for the people to participate more in the stock markets here. With the equivalent of over $1.3 trillion controlled by individuals in Japan, and a large portion of it in very low interest-bearing savings accounts, it remains true that only 7 percent of these funds are invested in stocks.
The markets are volatile and information remains crucial, but without increased investment and capital flow, the recovery of the Japanese economy will be even slower. Concerns about the scarcity of companies worth investing in or the dearth of stocks with potential for long-term growth should be assuaged by the potential offered by an SPE going private.
The U.K. provides a splendid example of how privatization can be approached smoothly with maximum economic benefit to the public and the government.
In the U.K., privatization was initiated by the Conservative government, which came into power in 1979 under Margaret Thatcher. Among the objectives that they promulgated were:
* To reduce government borrowing. * Increase share ownership. * Improve management. * Increase accountability.
The drive to reduce borrowing was aimed at reducing the interest burden on the public left by the debt created by prior administrations.
It was also aimed at lowering the high level of state borrowing, which had become commonplace. With privatization, a decrease in subsidization would also be realized.
Increasing share ownership engendered a “popular capitalism” under which individuals would own shares and actively participate in the economy. As an added benefit, criticism of the sale of national assets would be mitigated by the fact that the public would see a reduction in government debt. It would also obviate the need for government subsidies.
Personal gain from share ownership took several forms. One was bonus shares, whereby a limited amount of additional shares was awarded to shareholders, provided they held on to them for a certain period. (As an alternative to bonus shares, how about a discount on such items as utility bills if the shares are held for the same term? It would be difficult to see the material downside of such an investment.)
The plan to improve management was two-pronged: give incentive to managers and provide access to private-sector managers with significant skills or advice to offer.
In the government, the direct correlation between performance and salary is less clear.
Increasing accountability (and thereby efficiency) relied on the aspect of exposing an entity previously devoid of competition to the rapid evolution and demands of the business world. Efficiency and accountability would also be bolstered by private-sector financial knowhow.
Just what kind of economic spark could such programs produce, and what are the benefits the public could reap from successful IPOs?
A down economy would surely limit their results, but imagine an IPO in which the initial offering price is exceeded by 200 or 300 percent, garners 800 percent demand for the offered shares, or is heavily subscribed by foreign capital.
Here are some examples of SPEs, primarily in the service sector, that did just that.
You may be familiar with Deutsche Post AG, the German postal authority that was the subject of a privatization drive in November 2000. During a particularly down market there was 800 percent demand for the shares it offered on the Frankfurt and German National stock exchanges, which no doubt bolstered the German markets.
As I mentioned in a previous article (Business Insights, April 23), one concern the general public has is that individual investors will have no chance to participate in the share offering. In other words, won’t institutional investors be lined up to buy large blocks of stock while clients with small accounts at their respective brokers are made to wait until the price is already quite high?
Examining the cases of Autostrade and ENEL shows us that this problem can be avoided.
Concessioni e Construzioni Autostrade S.p.A. was formerly the Italian highway authority. As a part of its privatization, 50 percent of the shares were allocated for purchase by individual investors. Not only were these shares rapidly absorbed, but 77 percent of them were ultimately bought by individual investors who were not priced out of the market by institutional investors.
Likewise, when ENEL Societa per Azioni, an Italian electricity supplier, was privatized in November 1999 by listing on the Milano and New York stock exchanges, 3.8 million individual investors were able to participate and bought 61.7 percent of the shares offered, thereby making it the largest example of individual participation in the entire Italian stock market.
Will such opportunities to privatize run out once similar government services have launched their own IPOs, fading away like a dying economic spark?
In a word, no.
There is no limit to the kind of state-sponsored services that can be privatized. In the U.K.’s case, all electricity, water, sewage and gas services are privately held. As I mentioned before, even the Ballistic Missile Early Warning System in the U.K. is privately run.
Will Japanese flock in droves to subscribe to forthcoming IPOs? Will the number of individual investors who participate in government privatizations rise like they did in France, where 1 million became 5.6 million? No one can be certain, but the potential is real.
Considering the above approaches and examples, Mr. Koizumi’s path should be clear, and he should commence his term as Prime Minister with a flourish and bring the Japanese economy and public long-term benefits that will be a welcome change from the current economic turmoil.
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