In Strange Company: The Puzzle of Private Investment in State-Controlled Firms
Executive Summary — Why do "mixed corporations" exist? In which conditions could they become efficient organizational forms? In this paper, the authors argue that the effectiveness of mixed enterprise depends on a hybrid governance structure combining elements of private ownership with public checks-and- balances against uncertain governmental interference. This is a delicate equilibrium to obtain and one not without challenges. Exploring the promise and perils of this approach by looking at the recent experience of a sample of national oil companies (NOCs)-Brazil's Petrobras, Norway's Statoil, and Mexico's Pemex-the authors suggest that from the perspective of a social planner, the coexistence of minority private investors with state actors can generate improvements in operational and financial performance. From the perspective of private shareholders, there are risks that can be outweighed by some of the advantages of state-owned enterprises. Three different factors explain private investor interest. These are 1) the existence of countervailing privileges from partnering with the government, 2) the resort to improved corporate governance and legal constraints that limit the opportunity for political abuse, and 3) ex ante price discounting. Key concepts include:
- Carefully-designed governance provisions can mitigate, but not eliminate, the degree of political interference to the detriment of minority investors of state-owned enterprises.
- Neither the very presence of private investors nor the listing of stock on a major stock exchange solves in and by itself the political intervention problem.
- Because distinct governments may change governance rules at their discretion, it is critically important to have a structure of institutional checks-and-balances in place.
- The case of Statoil suggests that the presence of a technical, independent regulatory agency, with equal influence on private and state-owned firms, can reduce the level of outright interference by the government. Consequently, the discount applied by private investors may be reduced as well.
A large legal and economic literature describes how state-owned enterprises (SOEs) suffer from a variety of agency and political problems. Less theory and evidence, however, have been generated about the reasons why state-owned enterprises listed in stock markets manage to attract investors to buy their shares (and bonds). In this article, we examine this apparent puzzle and develop a theory of how legal and extralegal constraints allow mixed enterprises to solve some of these problems. We then use three detailed case studies of state-owned oil companies-Brazil's Petrobras, Norway's Statoil, and Mexico's Pemex-to examine how our theory fares in practice. Overall, we show how mixed enterprises have made progress to solve some of their agency problems, even as government intervention persists as the biggest threat to private minority shareholders in these firms.