In revitalizing the Japanese economy with Prime Minister Junichiro Koizumi at the helm, Japan should look to France as a model for privatizing its special-purpose entities in light of years of debate and analysis that have resulted in little action.
One criticism of the Japanese government is that it creates endless delays before executing reform, only to end up with very limited measures. In France, however, this logjam blocking privatization has recently been overcome.
The French example of privatization is particularly germane because of the government’s reputation for exercising strong control over national matters. The same situation exists in Japan. France has a long history of intervention in its economy and has privatized 30 government-run companies over the last 14 years.
The collision between privatization and nationalization resulted in a series of heated debates in the 1970s, and as of 1986, France was still seen as one of the most “state-controlled” nations in Europe.
Ultimately, France broke through with cases such as the France Telecom IPO and with laws to widely assist privatization, although some debate continues.
Here are a few of the many lessons to be learned from the system France developed:
* IPOs don’t need to be made all at once.
France’s privatizations quickly took place in four “stop and go” phases lasting about two years each. Even the lull from 1988 to 1993 saw some IPOs, but not as many, due to two majority changes in the government and the resulting delays.
Although these periods cover a span of 14 years, you can imagine how quick the pace seemed with IPOs of government entities hitting double digits every 21/2 years.
The scale of some the larger companies that were privatized (see table) helps to show that IPOs can be handled in cycles, rather than in one fell swoop.
* The right laws need to be in place.
France’s legal framework rests on three regulatory laws enacted on July 2, 1986, August 6, 1986, and July 19, 1993. These three together empower the parliamentary and administrative authorities to take the steps required to privatize companies.
Of these laws, I’d like to focus on the Law of July 19, 1993, which provided for the creation of a seven-member Privatization Commission to consult with the Minister of Finance on all details of the operation.
Without sound advice from consultants, the Minister of Finance would be hard-pressed to make effective decisions. In the French model (see privatization flow chart) the Steering Committee helped form the Privatization Commission by combining bankers, auditors, and legal consultants with company representatives. This commission in turn assured fairness by creating a list of core shareholders, setting a minimum sale price, and providing other supervision.
* The right manager needs to be in place.
The Ministry of Finance served as project manager, not only consulting with the Privatization Commission but also carrying out the IPO and selecting government consultants. After all, the public asset being privatized called for careful assessment of government objectives, personnel concerns and market effects.
In this light, let’s consider the France Telecom IPO.
They approached their IPO with the appealing attributes of being one of the most modern networks in the world, the leader in the French market, and a leader in customer satisfaction and efficiency. Working against them were their bent for technology, lack of competitive experience and low earnings per share.
The Minister of Finance and the government saw them through by focusing on the IPO, exercising their powers under relevant laws, flexibly creating a regulatory framework, and receiving guidance from a Privatization Commission. One specific measure that was taken was to make their regulatory framework transparent.
In addition, government employees retained their civil servant status if they were hired at a certain date prior to the flotation of the company.
The result of this thorough preparation was the biggest IPO France has ever seen. With 3.9 million subscribers and strong U.S. interest, the offering was a PR coup for privatization. As of 2000, their market capitalization had reached 123 billion euros.
As I have mentioned in previous articles, the profits in these IPOs do not stop with institutional investors. France is a case in point. Individuals investing in IPOs of privatized government companies in the country have ballooned from 1 million to 5.6 million.
Could Japan make use of the French privatization model? With the help of foreign advisers, a smooth transition under this model would be possible because the lessons learned overseas are universally applicable.
For example, BNP Paribas, a financial group headquartered in France, has used its successful experience (see table) to handle more than 14 privatizations since 1993, the most of any “book runner.”
Could foreign advisers assist with privatizations outside of France? Are these lessons truly universal?Taking BNP Paribas as an example again, the company has carried out 22 privatizations throughout Europe in diverse industries, including British Telecom, public utility Amga in Italy, Spanish oil firm Repsol, and water works and sanitation provider Aguas Argentinas. Foreign advisers are actually more the rule than the exception.
Which of the above steps appears to be unworkable for Japan? Wouldn’t it be nice to hear about a government success relating to business or the revitalization of the economy? To accommodate the strong government role in business and allow for a smooth transition, as with France, the transition need not be all at once. A few big IPOs every two years would keep Japanese and foreign investors happy, not to mention delivering Mr. Koizumi’s promises.
When considering the promising possibilities of privatizing SPEs, we Japanese should also say “L’Etat, c’est moi!” and collect the benefits that we’re entitled to as well.
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