Privatization and the New European Economy

by James E. Aisner

From France to Italy, Germany to Denmark, chances are good that if you pick a country in Europe, you can match it with its state-owned airline. But as Europe unites, barriers come down, and competition heats up, cross-border mergers have become fair game for airlines and other companies, while privatization garners attention in industries whose importance, infrastructure, and enormous capital needs once put them under the comfortable control of their governments.

Global Alumni Conference 2000: Berlin

Historically, observed HBS professor Richard Vietor in his introductory remarks to an Alumni Conference panel on "Privatization and the Role of the Governments in a Global Economy," the prime candidates for state-run operations clustered around five sectors of the European economy— transportation, telecommunications, financial services, energy, and heavy industry (namely steel, automobiles, and chemicals). Indeed, "some 12 to 15 percent of GDP in Europe was public sector enterprise," he said. But all that began to change in the early 1980s amid loud cries of inefficiency, as markets opened up and governments sought sources of revenue. While deregulation was the name of the game in the United States, Vietor noted, privatization was the dominant force in Europe. "In the past two decades," he said, "the public enterprise sector has been reduced to about 7 or 8 percent of GDP."

Each of the three panelists in the session knew exactly whereof Vietor spoke. As chairman of the executive board of the Deutsche Bundesbahn and the Deutsche Reichsbahn from 1991 to 1994, Heinz Dürr played a leading role in unifying the East and West German railroads into one national system that is scheduled to be fully privatized in 2004. Paul Reutlinger (a graduate of Harvard Business School's International Senior Management Program) has been in the thick of Europe's airline industry for decades. With more than thirty years' experience at Swissair, he has served as president and CEO of Sabena since 1996. Christoph Brand (HBS MBA '94), an executive director in the Frankfurt office of Goldman, Sachs, & Co., is responsible for the firm's business with the German public sector and public sector corporations.

Harsh Realities

Presenting his experiences as a kind of case study, Dürr recounted some of the harsh realities he faced when he began his six-year stint with the railroads in 1991, including deficits of 8 to 10 billion Deutsche marks and debts of over 20 billion marks. "Results were not important; markets were not a concern," he said. "Money came in courtesy of the Finance Minister, and the various stakeholders—from the supervisory board to the unions to the politicians—cared only about their own objectives." As the new German Railway tries to wean itself from total government ownership of its stock while depending on the powers that be in Berlin for infrastructure investments, Dürr expressed some doubts about how successful the company's privatization efforts will be in the long run. "Under our system," he observed, "this is very difficult to do."

In contrast, Paul Reutlinger has encountered no such hurdles at Sabena. Long known as Belgium's world airline, the company began to undergo a successful restructuring in 1995 when almost half of its stock was acquired by the SairGroup, a unit of Swissair; as of last April, their stake in the airline climbed to 85 percent. The move to the private sector has Sabena flying high. Its number of passengers has doubled over the past five years, for example, performance has improved markedly, and in 1998 the company recorded its first profit in forty years.

Reutlinger sees Sabena's shift from state to private ownership as part of a major and growing trend in the transportation and other industries that took root over the past decade. "During the 90s," he said, "the average amount of global privatization was valued at between US$70 to $80 billion. Experts predict that the potential for privatization in Europe in the decade ahead will have a value of between US$250 and 450 billion. This represents a huge shift," he continued, "as governments pass ownership to the private sector and become regulators—a position that will, in fact, give them more power to shape the competitive environment of industries not only in their own country but throughout the continent, as the European Union develops."

Growth Of World Trade

Christoph Brand pointed to the rapid growth of world trade as an important factor in the trend toward privatization. "With the considerable increase in the exchange of goods and services," he said, "governments had to be willing to adapt to new pressures and opportunities or risk losing their competitiveness." In addition, he commented, an increased need for capital and scarcity of public resources have influenced the phenomenon.

Brand noted that worldwide, 60 percent of privatizations were done via public offerings in the equity markets, while the rest involved mergers and acquisitions.

Going forward, he concluded, there are still some old rules that need to be lifted (state shareholdings protect European airlines from takeovers, for example), but a new Europe enters the twenty-first century headed in the right direction.