NOTE NUMBER 321 49115 viewpoint PUBLIC POLICY FOR THE PRIVATE SECTOR FINANCIAL AND PRIVATE SECTOR DEVELOPMENT VICE PRESIDENCY OCTOBER 2008 Privatization Trends Sunita Kikeri and A Record Year for Initial Public Offerings in 2007 Verena Phipps An up d ate of t he Wo r ld B a nk G r o up ’ s P r iv a t iz a t io n D a t a b a s e s h o w s Sunita Kikeri (skikeri@ worldbank.org) is an that in 2007 p r iv a t iz a t io ns in d e v e lo p ing c o unt r ie s a m o un t e d t o adviser in the Corporate US$133 b illio n— a r e c o r d in no m ina l t e r m s . T he hig h v a lue c a m e f r o m Governance Group of the p artial p riva t iz a t io ns t hr o ug h init ia l p ub lic o f f e r ing s — ma i n l y i n C h i n a Global Capital Markets Department of the World and the Russ ia n F e d e r a t io n a nd in f ina nc e a nd e ne r g y . T h e v a l u e o f Bank Group. Verena Phipps other p rivat iz a t io n t r a ns a c t io ns d e c line d o v e r a ll b ut g r e w i n i n f r a - (vphipps@worldbank.org) is a consultant in the Post- structure and t he p r im a r y s e c t o r , t ha nk s t o a f e w la r g e t r a n s a c t i o n s Conflict and Social Devel- in E ast Asia a nd L a t in Am e r ic a . P r e lim ina r y r e s ult s f o r 2 0 0 8 s h o w a opment Group of the World Bank’s Africa Region. sharp d rop in a c t iv it y a s a r e s ult o f t he g lo b a l f ina nc ia l c r i s i s . In 2007, 51 developing countries carried out 236 petitive (manufacturing and services) sectors This Note is based on privatization transactions, valued at US$132.6 bil- (table 1). Two-thirds of IPOs exceeded US$1 a World Bank Group database that uses transac- lion. Total transaction value was up 26 percent billion (up from a third in 2006). The average tion values as a proxy for from 2006 and 150 percent from 2005, marking size more than doubled, from US$1.2 billion in measuring privatization another record year in nominal terms. This result 2006 to nearly US$3 billion in 2007.3 trends. It includes only was driven by partial privatizations through ini- The 200 non-IPO transactions raised about the values resulting from tial public offerings (IPOs)—a trend that gained US$34 billion, down almost 20 percent from the full or partial sale, momentum in 2005–06 and took off in 2007, a 2006. Russia accounted for 32 percent. Another concession, lease, or initial record year for IPOs worldwide.1 The 36 IPOs of 25 percent came from just four transactions in the THE WORLD BANK GROUP public offering of existing state-owned companies, though just 15 percent US$1–4 billion range, in Mexico, Bolivia, Iraq, and state-owned enterprises or of all privatization transactions in developing the Philippines. The rest came mainly from other other government assets. For countries, raised 75 percent of total privatization transactions in the Philippines as well as transac- more on methodology, see value—US$99 billion, or 37 percent of worldwide tions in Turkey, Nigeria, China, and Brazil. http://rru.worldbank.org/ IPO value in 2007.2 The IPO results came thanks Privatization. to historic levels of net private capital flows and Regional highlights high GDP growth across regions. Thanks to IPOs, East Asia led in privatization Just two countries, China and the Russian value, followed by Europe and Central Asia (fig- Federation, raised 89 percent of IPO value, ure 1). Value increased in Latin America and Sub- accounting for 66 percent of total privatization Saharan Africa, declined in the Middle East and value, mainly in the finance, energy, and com- North Africa, and held steady in South Asia. PRIVATIZATION TRENDS A RECORD YEAR FOR INITIAL PUBLIC OFFERINGS IN 2007 Table IPO transactions and values in developing countries, 2007 competitive sectors. While Chinese IPOs in past years were mostly H-share offerings on the Hong 1 Percentage Percentage of total Kong Stock Exchange, in 2007 A-share offerings Value of total privatization on mainland exchanges accounted for roughly Transactions (US$ billions) IPO valuea valuea 50 percent of the country’s IPO value. China also By country had 22 non-IPO transactions, totaling US$1.3 bil- China 21 70.2 71 53 lion, in water, transport, and energy. Russian Federation 3 17.8 18 14 Excluding China, regional value tripled to Other 12 11 11 8 US$2.6 billion, though nearly 85 percent came By sector from just three transactions in the Philippines Finance 15 57.4 58 43 (energy, telecommunications, electricity). A Energy 4 21.1 21 16 toll road divestment in Indonesia accounted for Competitive 9 12.8 13 10 much of the rest. Infrastructure 6 6.1 6 5 Primary 2 1.6 2 1 Total 36 99 100 75 Europe and Central Asia: Russia led the way In Europe and Central Asia value grew from Source: World Bank Group, Privatization Database. US$35.5 billion in 2006 to more than US$40 a. Totals are for developing countries only. billion (31 percent of the total). The number of transactions rose by 40 percent to 117. Russia’s East Asia: Chinese IPOs dominated share of regional value doubled to 72 percent East Asia raised US$74 billion (55 percent of the thanks to its two large banking IPOs—Sberbank total), up 45 percent from 2006 and 236 percent (US$8.8 billion), its largest savings bank, and from 2004–05. The growth came mainly from Venshtorgbank (US$8 billion)—on the London China’s 21 IPOs, whose combined value of US$70 and Moscow exchanges. These were the top two billion accounted for 96 percent of regional transactions in the region and among the largest value. Six of China’s IPOs were in the US$5–9 globally. Thanks to 12 electricity sales for US$10 billion range, and nine in the US$1–5 billion billion, Russia also ranked as regional and global range. The two largest, at US$9.1 billion each, leader in non-IPO value. were PetroChina and China Shenhua Energy. Excluding Russia, regional value declined by Other Chinese IPOs were mainly in finance and half to US$12 billion. Three IPOs—Romania’s Transgaz (US$2.6 billion), Turkey’s Halkbank (US$1.8 billion), and Croatia’s Hrvatske Figure Value of privatization transactions in developing countries by region, 2006–07 Telekomunikacije (US$1.4 billion)—accounted for nearly 50 percent. Turkey’s non-IPO sales 1 0 2006 10 2007 20 30 US$ billions 40 50 60 70 80 (in services, real estate, and ports) contributed much of the rest. Even so, Turkey’s total value declined to just half its US$8 billion in 2006, in East Asia and Pacific part because of a few large transactions in that year and in part because of a slowdown in 2007, Europe and Central Asia an election year. Sales also occurred in Slovenia Latin America (banking), Hungary (banking, airlines), and and the Caribbean Poland (manufacturing). Middle East and North Africa Latin America: three large transactions Sub-Saharan Value in Latin America doubled to US$10.4 Africa billion, though the number of transactions South Asia fell from 17 in 2006 to 10 in 2007. Nearly 90 percent of value came from just three transac- tions: Mexico’s highway concession for more Source: World Bank Group, Privatization Database. than US$4 billion, Colombia’s IPO of Ecopetrol for US$2.8 billion, and Bolivia’s sale of develop- estate) and infrastructure (water, telecommuni- ment rights to the El Mutun iron ore deposits for cations, natural gas transmission and distribu- US$2.3 billion. Other activity was concentrated in tion, and electricity generation, transmission, Brazil (a large railway project and two electricity and distribution). transactions for a combined US$900 million), Colombia (electricity), Ecuador (ports), and Finance: record levels led by IPOs Honduras (telecommunications). In finance, transaction value in 2007 reached a record US$61 billion (46 percent of the total), Middle East and North Africa: steep decline growing from US$49 billion in 2006 and US$25 3 In the Middle East and North Africa value billion in the previous six years combined (figure dropped by nearly 70 percent to US$3.4 billion, 2). Driven by the demand for shares, the need for while the number of transactions declined from capital, and the continued opening of markets, 33 in 2006 to 20. The region had two newcomers: IPOs accounted for nearly 95 percent of sector Iraq, with its US$1.25 billion sale of a 15-year value and most of its growth. Nearly 67 percent mobile license, giving it a 37 percent regional of IPO value (US$38 billion) came from nine share; and Libya, with its US$205 million sale of Chinese banks and insurance companies, and Sahara Bank. Morocco continued its program another 28 percent (US$16.8 billion) from the with a secondary offering of 4 percent of Maroc two Russian banks, the top two finance transac- Telecom and the sale of a container shipping tions. Banking IPOs also took place in Turkey and company for a combined value of US$800 mil- Pakistan. Non-IPO finance sales occurred mainly lion. Jordan sold an electricity company and in Europe and Central Asia: Turkey and Georgia carried out an IPO of Royal Jordanian Airlines, (real estate), Hungary and Slovenia (banking), raising US$550 million. The Arab Republic of and Ukraine (insurance). Egypt, the main contributor in 2006, saw value plummet from US$7.6 billion to just US$310 Infrastructure: growth in electricity million in 2007 as public opposition brought its Infrastructure transaction value grew by 20 per- program to a virtual halt. Its value came mainly cent to US$28.4 billion (21 percent of the total).4 from the sale of stakes in three joint ventures. Value in electricity and natural gas tripled, return- ing to levels of the late 1990s and accounting for Sub-Saharan Africa: telecoms the leader more than half the infrastructure total. Nearly 85 Value in Sub-Saharan Africa increased by 26 per- cent to US$2.4 billion. Two-thirds came from Figure Value of privatization transactions in developing countries by sector, 2006–07 12 telecommunications transactions in 11 coun- tries. The rest came from a railway concession in Tanzania and sales in Nigeria in mining, oil and gas, electricity, manufacturing, and real estate (in 2 0 2006 10 2007 20 US$ billions 30 40 50 60 70 addition to telecommunications). Finance South Asia: share issues big South Asia raised US$1.34 billion, 80 percent of it Infrastructure from just three share offerings: Pakistan’s global depository receipt (GDR) offering of United Energy Bank and IPO of Habib Bank and India’s IPO of the Power Grid Corporation of India. Aside Competitive from two smaller share issues in Pakistan, other regional activity was negligible. Primary Sector highlights Two sectors accounted for nearly 70 percent of Source: World Bank Group, Privatization Database. total value: finance (banking, insurance, and real PRIVATIZATION TRENDS A RECORD YEAR FOR INITIAL PUBLIC OFFERINGS IN 2007 percent came from the sale of 12 companies in sectors with major investment needs, such as Russia and Romania’s IPO of Transgaz. The rest electricity and transport. came mainly from transactions in the Philippines, ■ Preliminary data for 2008 show a big drop Jordan, Colombia, and Nigeria. in activity as a result of the global financial Transport had only 15 transactions, less than crisis and the sharp reductions in capital half the number in 2006, but value held steady at flows to developing countries. IPOs, which viewpoint around US$6.7 billion. Nearly 60 percent came began slowing in late 2007, came to a virtual from Mexico’s US$4 billion highway concession. halt. Non-IPO transactions also declined. In is an open forum to Large port and railway concessions accounted infrastructure many new projects scheduled encourage dissemination of for most of the rest: Turkey’s Port of Mersin (for for 2008 were postponed or canceled because public policy innovations more than US$750 million) and Brazil’s Norte of difficulties in securing private financing. for private sector–led and Sul Railroad (US$760 million). Takeovers and nationalizations, previously market-based solutions for Value in telecommunications declined by limited to extractive industries in a hand- development. The views nearly half, to US$5.8 billion, mainly because of ful of countries (Bolivia, Ecuador, Russia, published are those of the smaller transaction size: the top three transac- and República Bolivariana de Venezuela), authors and should not be tions in 2007—in Croatia, Iraq, and Morocco— occurred in or threatened other sectors, most attributed to the World generated less than half the US$7 billion for the notably banking. Bank or any other affiliated top three in 2006. Transactions took place in organizations. Nor do any 23 other countries, nearly half in Sub-Saharan of the conclusions represent Africa. official policy of the World Value in water and sewerage grew fivefold Notes Bank or of its Executive (though from a low level in 2006) to US$950 1. While IPOs do not involve outright transfer of owner- Directors or the countries million. Except for one transaction in Georgia, ship or management control, they dilute government they represent. all activity was in China. ownership and so are included in the database. 2. Global IPOs reached record levels in 2007, with more To order additional copies Energy, competitive, and primary sectors: than 1,830 IPOs raising over US$270 billion (Ko 2008). contact Suzanne Smith, growth from a few large IPOs 3. The average for 2006 excludes two record-breaking managing editor, Value in energy grew by 12 percent to US$22 bil- Chinese transactions: the IPOs of the Industrial and Room F 4K-206, The World Bank, lion, 80 percent of it from the IPOs of PetroChina Commercial Bank of China for US$22 billion and the 1818 H Street, NW, and China Shenhua Energy and 13 percent from Bank of China for US$13.7 billion. Washington, DC 20433. Colombia’s IPO of Ecopetrol. Value in competi- 4. Value in infrastructure includes only payments to tive sectors grew by 30 percent to US$15.1 billion, the government through sale revenues and concession Telephone: 85 percent of it from nine IPOs, all but one in or lease fees. It excludes greenfield investments and 001 202 458 7281 China. Value in the primary sector grew by 65 investment commitments by new owners and operators, Fax: percent to US$6.3 billion. Some 25 percent came which increased in all infrastructure sectors in 2007 and 001 202 522 3480 from two Chinese IPOs and the rest from two even peaked in some (transport, telecommunications). Email: non-IPO transactions (in Russia and Bolivia). See Izaguirre (2008). ssmith7@worldbank.org Conclusion References Produced by Grammarians, Inc. ■ IPOs grew in importance in 2007, accounting Izaguirre, Ada Karina. 2008. “Private Activity in Infra- for three-quarters of the transaction value of structure Reached a New Peak in 2007.” PPI Data Printed on recycled paper privatizations in developing countries, with Update Note 13, Finance, Economics, and Urban most in China and Russia. IPOs dilute state Development Department, World Bank, Washing- ownership of companies and may lead to ton, DC. performance improvements, but states retain Ko, Kenneth. 2008. “IPO Boom.” Perspective (Spring): majority ownership and control. Improving 20–21. corporate governance is among the main chal- lenges going forward. ■ The value of other (non-IPO) privatizations declined overall but grew or held steady in This Note is available online: http://rru.worldbank.org/PublicPolicyJournal