The Future of State-Owned Financial Institutions

14. Initial Public Offerings

 Initial Public Offerings 14 S   1980s, a growing number of state-owned enterprises have been privatized, with the total value of privatization transactions in the period 1982–2000 amounting to more than $1 trillion.1 After privatizing industrial firms, governments increasingly began to dispose of companies from regulated industries such as telecommunications, utilities, and banks. Bank privatization has been prevalent throughout the world. Of the 101 countries that conducted privatization transactions between 1982 and 2000, about half privatized state-owned banks. Overall, privatization of state-owned banks accounted for approximately 11 percent of the number and 10 percent of the value of transactions. Bank privatization has been much more frequent in developed than in emerging economies. Almost 86 percent of the Organization for Economic Cooperation and Development (OECD) countries that privatized enterprises also privatized banks. To date, only 41 percent of the non-OECD countries with an active privatization program have sold a state-owned bank. While bank privatization seems to be in the final phase in OECD countries, governments in emerging economies are only about halfway through the process. In emerging economies, bank privatization did not gather momentum until the early 1990s. Increasingly, governments have changed their views on the strategic role of banking in relation to government dirigisme in economic development  .  1. Boehmer, Nash, and Netter (2003). 14-1335-5-CH 14 12/9/04 3:40 PM Page 315 planning. To date, the value of state-owned bank privatization in emerging economies is close to $38 billion. Of the eighty non-OECD countries that have privatized enterprises, thirty-three have privatized 156 state-owned banks. For the average non-OECD country, 9 percent of the total transactions have consisted of bank privatizations, representing 11 percent of total dollar value. In about 44 percent of the emerging economies, banks were privatized by means of a share offering (mostly initial as opposed to secondary offerings). This chapter examines the use and efficacy of initial public offerings as a strategy for bank privatization in emerging economies, outlining the relevance of bank privatization , describing the process, and analyzing the objectives of bank privatization in relation to the use of initial public offerings. Case studies from Mexico and Poland point out practical lessons. The Relevance of Bank Privatization Bank privatization in emerging economies merits attention for a number of reasons . For one, the volume of bank privatization in emerging economies is likely to be significant in the coming years. Developing country governments have only partially progressed with bank privatization. On average, about 30 percent of banking assets are held by state-owned banks in low- and lower-middle-income countries compared to about 10 percent in OECD countries. Consequently, state-owned banks still play an important role in the non-OECD banking sector. South Asian countries have the highest proportion of banking assets that are government controlled (60 percent), followed by the developing economies of Europe and Central Asia (more than 30 percent).2 It is in these regions of the developing world that the economic effects of privatization are likely to be most pronounced. Bank privatization plays a key role in economic development. An analysis of empirical studies on bank privatization shows that privatization improves performance over continued state ownership even in poor regulatory environments.3 An investigation of bank privatizations that use public security offerings as the divestment mechanism concludes that profitability, operating efficiency, leverage, and noninterest revenue improve after privatization.4 The positive efficiency effects of bank privatization, in turn, are of great importance in the economic development of emerging economies. State ownership negatively affects bank performance and   2. Barth, Caprio, and Levine (2001). 3. Clarke, Cull, and Shirley (2003). 4. Verbrugge, Megginson, and Owens (1999). 14-1335-5-CH 14 12/9/04 3:40 PM Page 316 financial sector development.5 Greater state ownership in 1970 was found to be associated with less financial development, slower growth, and lower productivity in 1995.6 However, bank privatization will deliver significant efficiency gains only if government relinquishes control and abstains from interfering in the affairs of the privatized bank. Banks in emerging economies have a strong, perverse incentive to fund former debtors—even though these state-owned enterprises are less efficient and more risky than private firms—because by doing so they have the potential to receive payment for previous debts.7 This inevitably leads to lower productivity of investment and greater concentration of risk. It is...