Up to this point, we have analyzed the company's capital structure in terms of debt and equity. There is another relevant dimension form the financial point of view since it affects the structure of incentives and the behavior of the project's private partners: the degree of shareholding dispersion. When the PPP project is designed on the basis of an existing company and not a new project (green field), a problem with the way in which the private capital is introduced arises.169
In this regard, there are two alternatives that are fully illustrated by the experiences of Chile and the United Kingdom, on the one hand, and Argentina, on the other. Both in the United Kingdom and Chile, private participation was incorporated through the "retail" sale of stock in stock markets. On the contrary, in Argentina, the government sold a "Buyout Package" in the companies to a single strategic investor through a bidding process.170
A choice of either one of these mechanisms has its pros and cons. The sale of stock in the stock exchange allows, under certain circumstances, the induction of efficient behavior by the companies through the discipline imposed by capital markets. If there is a fairly efficient capital market, the risk of a "hostile takeover" guarantees a certain degree of minimum efficiency and discipline on the part of corporate managers. The mass ownership of stock by the public achieved through the public trading of stock provides the private participation process with greater political assurance by rendering it more credible, as the more dispersed the ownership of the stock the higher the political cost of potential opportunistic conduct by the government to the detriment of service providers.
The main negative aspect to be taken into consideration in connection with this form of private participation is the existence of a marked principal-agent problem. Given that most of the stock is acquired by passive investors (such as pension funds, investment funds or small private investors), the company's management is now in the hands of a few stockholders and the existing managerial officers of the company. Their tendency to act in their own interest rather than in the best interests of the company and its stockholders (i.e. their principal) may lead to serious inefficiencies that are boosted if there is no efficient capital market that will operate as an effective limitation to this sort of behavior.171
Hardly could the difference between Chile and the United Kingdom in this regard be any more illustrative. The marked development of the capital market in the United Kingdom led, once the legal restrictions existing over the first few years were left behind, to an active process of mergers and acquisitions. In Chile, where the capital market is much weaker, there has been no serious limitation on the actions of a few investors.172
Given that the degree of development of the capital market in Argentina is closer to the Chilean case than it is to the UK's, the selected private participation methodology, which consisted in awarding the Buyout Package in the various business units to be offered through a bidding process, seems to be appropriate (see BOX 47).
BOX 47: Concessions Mechanisms in Argentina
| The selected mechanism consisted in creating corporations with different classes of stock. Class A stock represented the Buyout Package, and was sold in block through a bidding process. Class B stock was intended for subsequent sale in the capital market and remained in the hands of the State until the decision to sell was made. Lastly, Class C stock represented the portion allocated to the Programa de Propiedad Participada [employee stock ownership plan] allowing the participation of workers in the concession process. The eligibility requirements to bid for class A stock included having a qualified technical operator (which could or could not be a member of the investing consortium) and minimum financial requirements to be satisfied by both the investing consortium and each member thereof. Furthermore, the holders of the Majority Shareholding were prevented from changing their stake and/or selling their stock in the first 5 years. Thereafter, they were allowed to do so only upon prior approval by the Regulatory Authority. |
Whereas the technical operator requirement guaranteed that the investors would be adequately qualified, from the technical perspective, to perform certain and effective control of the operating aspects, the financial requirements were intended to guarantee that the controlling group had sufficient economic-financial capacity to meet its contractual obligations. The aim was to secure the participation of strategic investors who, having secured control of the privatized companies, would act to optimize the company's efficiency (as the principal-agent problem disappears or, at the very least, is minimized).
The option adopted also tried to include the disciplines associated to market forces by dividing the concession into shorter terms, when the concessionaire' buyout package was put up for bidding again (see BOX 48).
BOX 48: Management Periods in Electricity Distribution in Argentina
| In the case of electricity transmission and distribution, the aim was also to include a certain degree of capital market discipline by dividing the concession, which was granted for a period of 95 years, into 10 - year management periods. Through this mechanism, the majority Buyout Package is periodically put up for bidding, thus allowing "competition by the market" while serving as an explicit mechanism of acceptance of the new tariff schedule. This solution, which is intended to avoid the principal-agent problems associated with the sale of stock in the stock exchange, while explicitly introducing periodic mechanisms of market competition, appears as a novelty in terms of forms of privatization that seems to provide an ingenious solution to the trade-off between strategic investors and capital market discipline. |
This combination of a strategic investor (through the sale of the buyout package) and, at the same time, the preservation of certain market discipline (via the management periods) appears to be an intermediate solution that aims to minimize the efficiency costs and losses associated to "pure" alternatives.
This strategy, however, is not free from inconveniences. The first potential problem presented by the management periods mechanism is the marked information asymmetry between the incumbent and the remaining potential bidders. Even though the regulations make explicit provision for the appointment of an overseer by the regulator to "guarantee that bidders are provided with the most detailed and accurate information…" the advantage of having direct knowledge of the company by being in charge of its operation can hardly be equated.
Given that taking part in a bidding process is costly (both in terms of time and of financial resources), the advantages enjoyed by the incumbent can operate as an effective barrier to the participation of other interested parties.
Empirical evidence of the PPI Database shows that PPP firms that are quoted in the stock exchange can be associated with a strong reduction in the incidence of distress within the sample firms173. Without being conclusive on the convenience of adopting one criterion or the other, this would give grounds to the positive role that market supervision plays, as well as the discipline that the risk of a hostile buyout through the stock market imposes on the management.
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169 As we have already explained, the adoption of one mechanism or the other greatly depends on the technological features of the project. Typically, projects involving highways, water treatment plants or electric power generation units, adopt the green field format. On the contrary, the private participation in water or electricity distribution or urban transport mostly takes place in pre-existed companies
170 In general, all Latin American experience has followed the same pattern adopted by Argentina, except for certain local variations, where the private sector is introduced as a strategic partner.
171 The technological complexity of these sectors aggravates the problem by rendering control of the agents' actions by their principal more difficult. In other words, the increased asymmetry of information increases the possible rent associated therewith.
172 According to Bitrán [1993] this would be the case with Chile's electricity sector. Notwithstanding the arguments put forth by this author, it is possible to at least partially justify the privatization methodology in the light of the behavior of these companies. The dynamic action of the groups created as a result of the privatization, which showed a true Schumpeterian spirit by expanding their business in the entire region, might justify the internal inefficiencies in the Chilean sector.
173 Section VIII.a shows in details the impact that this and other measures have on the incidence of distress situation in PPI database.