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Why Can’t the State Be an Ordinary Shareholder

BLOG - 21 March 2019

By Institut Montaigne

Be it on 24 hours news channels, social networks’ timelines or newspapers, France does not seem to lack debates and political agendas around the notion of privatizations and state shareholding, the most notorious being Aéroports de Paris (ADP), along with Française des Jeux (FDJ), ENGIE and the PACTE legislation. France’s Agence des Participations de l’Etat (APE), which is in charge of major portfolios in terms of state shareholding, is experiencing significant doctrinal changes. As we already advocated in our note on state shareholding, these changes were and remain necessary.

What do the radically different positions on SNCF on the one hand, and ADP, FDJ and ENGIE on the other hand reveal of the State's shareholder policy orientation? We must first understand the mechanisms through which the state keeps its role as a direct administrator with regards to SNCF, and how it privatizes the others. These cases being particular situations, one shouldn’t disregard the general performance trend of state-owned companies that led to these conclusions.

Understanding what the public administration’s plan is for the many (and diverse) public companies.

Recent developments regarding companies traditionally owned by the public sector (e.g. SNCF, FDJ) reflect significant changes in APE’s position. Indeed, APE clearly expressed its new doctrine in its latest activity report, which consists in focusing shareholding on three main categories:

  • companies performing a public service for which the State does not hold sufficient non-shareholding levers,
  • strategic companies on which relies national sovereignty,
  • and companies representing a systemic risk.

Put differently: unlocking value in order to invest in companies and sectors identified as strategic. This strategy actually completes – and is part of – the industrial project of the PACTE legislation.

By January 1st, 2020, SNCF will consist in one 100% publicly owned company instead of three at the moment.

On the one hand, SNCF is undergoing major changes: by January 1st, 2020, it will consist in one 100% publicly owned company instead of three at the moment; the State will also take over 35Bn€ of its debt out of 50Bn€ and set a golden rule regarding indebtedness. This is the direct translation of the application of the new strategy to the first category of companies mentioned above – which we had advocated back in 2017. This is a way of guaranteeing the delivery of a public service that in fact relies much more on taxpayers than on its clients.

On the other hand, partial privatizations of companies which do not fall under any of the aforementioned categories must be compensated by enhanced regulation for each concerned sector. In the context of reduction of the shareholding scope, delegating power to a regulation agency is seen as a way of preventing public authorities from disregarding sensitive issues - in the case of FDJ, gambling addiction or money laundering - without being bound by political agendas as a ministry or a state secretary would be.

On the medium to long term, poor general financial performance and philosophical contradictions have paved the way for this doctrinal reorientation

As early as 2017, we had already expressed our view on the French State as a shareholder. The least we can say is that the public administration does not have the attitude nor the mindset of an ordinary capitalistic shareholder. When tackling the issue of state shareholding, examining its performance is the most pragmatic way to shed light on the relevance of this economic lever.

  • On the middle to long term, financial performances lack stability 

The financial performances of the state as a shareholder can be evaluated through the financial portfolio of the Agence des Participations de l’Etat (APE), which comprises 12 publicly listed companies as of June 31st, 2018 on a total of 81 companies. Although the latest numbers are good - a 16% increase in the value of the listed companies portfolio mainly based on the 4bn€ recapitalization of EDF and the good results of the aeronautics and defense sectors -, the financial profitability of the state shareholding activities are, in general, far from exemplary : -11% in 2017 (+4.86 for the CAC 40), -54% between 2006-2016 at constant scope (-12.3% for the CAC 40). Looking at the larger picture, the return on equity of the APE, Caisse des Dépots et Consignations and Bpifrance was more than three times lower on average between 2010-2015 than that of the SBF 120 on the same period. On the long term then, the performance of public-owned companies isn’t sufficient to counter global competition, which has a negative effect on the national industry.

  • The principle of state shareholding lacks coherence and readability

The observation of these perfectible performances leads us to question the philosophical relevance of state shareholding, which in reality carries multiple contradictions. First, the corporate legal framework is very different from the public one, and not solely in appearance. This is visible in the governance field: top-level executives are appointed by the Council of Ministers and overrule the nomination power of the board of directors. It is also evident in the handling of inside information: the administration tends to disseminate it, while stock market regulators are very strict regarding the risks of insider trading. The multiple roles of the public authorities in the national economic activity (regulator, legislator, public policy maker, shareholder and often client) make its involvement in corporate entities much less readable, at the expense of long-term visibility.
Secondly, cultural gaps between traditional shareholding and state shareholding are obvious and exist on multiple aspects. Aims, arbitration capacities, strategic mobility, consideration of national economy, are some of the crucial points public and private shareholding cannot, by essence, agree on. In addition, the state’s absolute aversion to risk, closely tied to its dedication to serve the general interest - which by the way is the first value the APE listed in its annual report 2017-2018 - seems far from compatible with shareholding activities. While the private shareholder is usually criticized for not taking enough risks, the public shareholder, mainly because it is permanently in the spotlight, is reluctant to take risks with the capital of French taxpayers - and voters.

Written by Waël ABDALLAH for Institut Montaigne




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