INTOSAI Working Group on the Audit of Privatisation

ADDITIONAL PAPERS FOR THE SEVENTH MEETING
BUENOS AIRES, 18 and 19 SEPTEMBER 2000

The state as minority shareholder in privatised business

Paper by the Supreme Audit Institution of Hungary

Mr. Chairman, Ladies and Gentlemen,

During this year’s audit of the Privatisation and State Holding Company we paid special attention to examining the management of the minority shares. Before the presentation of the current situation let me shortly outline the privatisation process implemented in Hungary during the past 10 years.

Figure 1: The change in the number of state owned corporations between 1990-2000

During the first stage nearly two thousand undivided state enterprises had to be transformed into companies. Today we have altogether three functioning undivided state enterprises.

Figure 2: The total of state owned (limited or joint-stock) companies during that period

The transformed enterprises along with the newly established and taken over companies served as the basis of privatisation. As you can see there were already only 1747 companies.

Figure 3: Privatisation process on the base of state owned companies

The majority of the 1747 companies were 100% sold, while more than 300 were dissolved without legal successor. Thus we have today 192 companies in total or partial state ownership.

Figure 4: Division of existing companies according to ownership

Out of 192 companies the state has the majority stake in 105.

Based on ownership the rest are divided as follows:

- Significant influence

- Minority beyond 10%

- Minority below 10%

- Golden share

Regarding the minority portfolio of the State Audit Office audit went back to 1995 and covered the circumstances leading to the present situation as well as the trade policy of the Holding Company relating to the future.

Main statements of the audit:

Based on the Privatisation Law the Privatisation and State Holding Company may offer for sale, in proportion to the property, the share of state company below 25% + 1 vote to the other members of the company or to the company - in this order. When this procedure is unsuccessful or cannot be implemented - for instance when there are several hundreds of owners - the share may be sold at public auction, public offering or private placement.

Since 1995 the Privatisation and State Holding Company has implemented 715 privatisation transactions where the state ownership of the relevant companies did not reach 25% + 1 vote and this property proportion became 0% after the transaction.

Figure 5: Main types of the 715 transactions since 1995

Main types of transactions:

• 281 share packages were sold through public bidding.

• When transforming a State Enterprise the value of the landholdings of the enterprise registered in the balance sheet, belonged to the municipality. Based on legal obligation the minority share of 330 enterprises were given to the municipalities as compensation for the land.

• In 54 cases banks with state interest gave some other securities for the shares.

• The Privatisation and State Holding Company took as a contribution in kind the minority shares of 44 companies into companies dealing with reorganisation and property utilisation.

• The minority share of one company was sold through privatisation leasing.

• The minority shares of 5 companies were taken out of the portfolio of PSHC by liquidation or final settlement.

In 1995-1996 the Privatisation and State Holding Company tried to establish a so called privatisation portfolio from minority stakes not reaching 50%, involving approximately 120 companies . A proposal was prepared for the sale of these shares by a one round private bidding. The tender, however was rejected by the Directorate because of the high risk.

The minority shares are handled by several professional Directorates on the same principles as the majority stakes.

As a summary:

The Privatisation and State Holding Company has no separate privatisation strategy for the utilisation of the minority shares. The strategy for implementation of different transactions has been determined by principles in which the ownership had only secondary importance. Neither in division among the Privatisation Company transaction departments played the rate of ownership a role.

Even in planning the expected incomes and expenditures relating to the privatisation of the shares of minority ownership is not separated.

Though the Company has implemented numerous transactions of minority shares it is a fact that the number of companies with insignificant nominal value, ownership rate and market value do not seem to decrease as would be desirable.

In the Management Letter prepared to the Privatisation and State Holding Company we drew the attention to the importance of the management of the minority portfolio and proposed the development of a separate management and utilisation policy.

Mr. Chairman, Ladies and Gentlemen, thank you for your attention.

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