Political control of state and municipality

owned firmsPolicy research seminar

Jiří Skuhrovec, 27.3.2014

SOEs - Definition

• That is joint stock, limited, national and state companies (a.s., s.r.o., s.p., n.p.), where public bodies own more than 50%.

• It is quasi-public (founded mostly according to corporate law)• Largest: ČEZ (and daughters), České dráhy (and daughters), Česká

pošta, Budvar, Dopravní podnik Praha, Lesy ČR, Český aeroholding..

SOEs in Czech republic - status

• GDP share – I challenge you to find out • Companies with turnover > 1 mil. CZK count: 1096 and growing• Overal turnover 680 bln. CZK• 83% owned by state, rest is municipalities• Minor companies – hospitals, asset management etc.

SOEs in Czech republic – dynamics. Why?

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 20110

500

1000

1500

2000

2500

3000

3500SOE total Assets

bln. CZK2012 pricesSource: ČSÚ

SOEs growth – Economic rationale (?)• None whatsoever. State doing business implies

• Principal agent problems• Corruption risks• Soft budget constraint ( see Česká pošta, České dráhy, various hospitals… )

• Privatization leftovers? Not really…• Non economic rationale

• strategic interests (ČEZ .. Ok. Budvar .. Come on )• Political incentives • Other suggestions?

OECD guidelines

• OECD: If you NEED to have SOEs, they should be managed independently on politicians

• Two-layer governance structure• Supervisory board is chosen of independent experts to prevent

conflict of interest issues and political abuse of SOE‘s. • Maximum transparency to minimize risk of misconduct

Study – turnover of supervisory boards• Hypothesis – apolitically managed firms should have organizational

changes randomly distributed in time• Method:

• Drawing graphs (this is how policy relevant arguments are done :-/ )• Hypothesis testing … no need to. You will see• But we will do them after all.

Turnover of supervisory boards (cities)

0

10

20

30

40

50

60

70

80

2002

Elections au-tumn 2002

20042000 2006

Elections au-tumn 2006

2008 2010

Elections au-tumn 2010

2012

Replaced super-visory board di-rectors of 94 en-terprises owned by municipalities

Turnover of supervisory boards (regions)

0

5

10

15

20

Elections au-tumn 2004

2004 2006

Elections au-tumn 2008

2008 20122010

Elections au-tumn 2012

Replaced su-pervisory board directors of 29 enterprises owned by re-gional govern-ments

Results

• Hypothesis rejected – regions, municipal• State companies – methodology unapplicable. 10 govts over past 14

years…

Research questions:• Why the political control?• How to document political infulence on firms managed by central

government? (case by case examination?)• How to demonstrate shift of agenda to the SOE’s? (expenditures

sturcture?)

Transparency evasion through SOEs?• You dont need to procure if:

• You are a business with industrial or commercial nature• You are network industry (sometimes)

• You dont need to answer 106 questions if • You have good lawyers

• Political opponents dont see what you do if• You are not stupid enough to put them into the board

How to document this?

Bright future?

• New govt. appoints council for board nominations• Yet, these are mid-level ministry officials with no experience with

business, subordinate

Thanks for attention