Policy Dialogue on Corporate Governance in China Shanghai, China 25 - 26 February 2004

1. Policy Dialogue on Corporate Governance in China Shanghai, China25 - 26 February 2004 Session 2: Ownership transfer in an efficient and fair manner Selecting proper privatisation methods Adolfo Di Carluccio Ministry of Economy and Finance of Italy

2. Contents of the presentation • The key objectives/drivers of the Italian privatisation program and its scope • The main privatisation methods in Italy The achievements of the program (and the shortcomings) relative to the stated objectives

3. The key drivers of the Italian privatisation program and its scope • The key drivers of the Italian program: • The need for fiscal adjustment • a soaring level of budget deficit and public indebtedness with high government bonds spreads; • a mounting drag exerted by SOEs on public budget • the pressure stemming from the EMU • The need for developing capital markets and equity culture, also through strengthening institutional investors and market infrastructures (corporate governance) • Improvement in corporate efficiency

4. The key drivers of the Italian privatisation program and its scope • The size of the Italian privatisation program • SOEs’ value added as % of GDP declined from 19 to 2,6% in the period 1990/end-2002 • Over € 120 bl. sold (1992-2003) • Government ownership’s phasing out completed in nearly all the commercial sectors

5. The key drivers of the Italian privatisation program and its scope Proceeds from privatisations in UE countries (1992-2000, in billions of US $) • Italy tops all the other UE countries as to proceeds and the share (roughly 87%) of state-owned assets disposed through public offerings • Development of capital market perceived as a long-medium term objective rather than as a constraint Source: IFR Thomson Financial International

6. The main privatisation methods in the Italian program Different privatisation methods,serving different objectives (pros and cons) • Trade Sale • Stable core of shareholders • Public offering • Sale to employees

7. The main privatisation methods in the Italian program - Trade Sale Pros • Stronger improvement in corporate efficiency expected (conducive to stronger governance structure for the company) • Better outcomes in terms of proceedings (price premium embedded for control) • Transfer of technology and managerial skills • Only minimal restructuring required (weakinformation asymmetry between buyer and seller and buyer’s risk aversion to be overcome) Cons • Conducive of inefficient allocation of resources and potentially prone to corruption if not based on transparent competitive bidding • If based on transparent competitive bidding in strategic sectors it cannot prevent foreign investors from acquiring the asset • Misses the potential for capital market development.

8. The main privatisation methods in the Italian program -Stable core of shareholders Pros • Promotes strong stable governance • In strategic sectors insures national controll over the company and protects against hostile take-over • Only minimal restructuring required (weak information asymmetry between buyer and seller and buyer’s risk aversion to be overcome ) Cons • All the trade sale’s cons • Possible large discount for the sale price • Potentially damaging to good corporate governance

9. The main privatisation methods in the Italian program -Public offering Pros • It is an open competitive asset allocation process • It fosters capital market and equity culture development Cons • A great deal of preparation and planning and company’s restructuring required (to address information asymmetry and buyer’s risk aversion) • Relatively well-developed and liquid capital markets and legal infrastructure are required to be already functioning • Generally not aiming at revenue maximization (underpricing and discount often granted)

10. The main privatisation methods in the Italian program - Sale to employees Pros • Increased incentives for improved efficiency through aligning the interests of workers with those of the owners. • Helps gaining employee support for privatisation. Cons • Corporate governance weaknesses(employees as shareholders, if participating in decision making, are more concerned about employment level than profit)

11. The main privatisation methods in the Italian program How did the Italian government manage to optimise the underlying tradeoffs? • Large resort to: • mixed procedures • public offering of minority stakes of large SOEs • Strong long-lasting ownership structure for newly privatised companies (NPC) but the controlling stake not to be indefinitely shielded from competition for corporate control (no cross-shareholdings or other shareholder agreements required) • Multiples tranches to maximize proceedings • Involvement of both retail and institutional investors (including foreign ones) • No strong underpricing • Golden share to protect against take-over of a NPC where the industry is deemed to be of strategic or public interest.

12. The main privatisation methods in the Italian program Typically the Italian Government resorted to 2 schemes of privatisation methods • Mixed sale procedure typically combining trade sales with a public share offering, involving both retail and institutional investors (plus sometimes a sale of stakes to employees) • public offering of minority stakes of large SOEs, involving both retail and institutional investors (generally through multiple tranches), while retaining a controlling stake

13. The main privatisation methods in the Italian program

14. The main privatisation methods in Italy Mixed sale procedure • It serves well the goal of capital market development • But also insures a strong governance structure • A long-lasting ownership structure for newly privatised companies envisioned • But the controlling stake not to be indefinitely shielded from competition for corporate control • No resort to a stable core of shareholders in its “strong” variant

15. The main privatisation methods in Italy Public offering of SOEs’ minority stakes while retaining public controlling • Protecting the company from hostile take over and ensuring protection of public interest by retaining government control over the company while putting it under the discipline of financial markets • Gradual disposal of State-owned companies through multiple tranches over a period of time as a sale strategy to maximize total proceeds • But also a policy device to take time and allow financial market institutions and equity culture to develop

16. Retail participation in the program and promotion of equity culture • Public offerings often designed to attract individual investors, and sometimes favour the employees of companies being privatised, with preferential share allocations and other incentives • bonus shares (typically after 1 or 2 years ) • money back guarantee (i. e. in ENI 1 transaction) • price discount • Market surveys undertaken before the offering - Creating media awareness • Strong advertising efforts before the offering

17. Retail partecipation in the program and promotion of equity culture

18. Retail participation in the program and promotion of equity culture No strong underpricing; equity culture not promoted at the expenxe of proceeds

19. Significant Participation of Foreign Investors • Italian privatisations targeted international investors, especially at the beginning of the process, thus attracting an increasing number of them • Most Italian privatisations were offered to US investors (SEC registered or 144a) • discipline of exposure to world’s largest capital market seen as necessary for privatisation program's credibility • Italy is now firmly established as an integral part of all European equity portfolios Rest of the World 7% Europe Domestic 13% 30% UK 23% US 27% Eni 1 Nov. 95 Enel Oct. 99

20. Significant Participation of Foreign Investors • Foreign investors have played an important role, particularly at the early stage of the process • International credibility has been a priority target to ensure success of privatisation program ALLOCATION BREAKDOWN IN ITALIAN PRIVATISATION OFFERINGS (AVERAGE) OPV INSTITUTIONAL ITALY INTERNATIONAL 1993-1994 40% 10% 46% 46% 15% 39% 1995-1996 52% 20% 28% 1997-1998 64% 14% 22% 1999

21. 80 70 16% 60 50 40 Volume in Euro billions 84% 19% 30 17% 20 81% 22% 26% 10 45% 83% 38% 78% 74% 55% 62% 0 1993 1994 1995 1996 1997 1998 1999 Significant Participation of Foreign Investors ITALIAN M&A MARKET Foreign bidders have been an important component of the M&A activity in recent years Italian bidder Foreign bidder

22. The Italian privatisation program: its impact on capital markets Increase in stock market capitalization (1979-2003) Source: Italian stock exchange

23. The Italian privatisation program: its impact on capital markets Source: Datastream and Italian stock exchange

24. The Italian privatisation program: its impact on capital markets Source: Datastream

25. Corporate ownership patterns of privatised firms PO: public offering (*) Retained by the State in the case of Enel and Alitalia (**) In case of several tranches figures refer to ownership structure at the time of the last one Source: Bloomberg and the Ministry of the Economy and Finance of Italy

26. Corporate ownership patterns of privatised firms The large number of shareholders created by public offerings proved to be an unstable pattern of corporate ownership • Share ownership structure in partially and fully privatised companies has showed a trend towards concentration • In non-financial industries strategic/ industrial investors have substantially expanded their controlling stake in the companies after privatisation • Stickiness in the ownership of the controlling stake • Corporate ownership of privatised firms has shifted away from institutional towards retail investors

27. Corporate ownership patterns of privatised firms PO: public offering Source: Bloomberg and the Ministry of the Economy and Finance of Italy

28. Corporate ownership patterns of privatised firms However • the average share of equity owned by institutional investors in newly or partially privatised companies (6,6 percent) still higher than the corresponding average share for the stocks included in the Milan stock exchange MIB 30 index (5,4 percent). • in the financial industry ownership structure more dispersed relative to that prevailing in non-privatised companies • in the financial sector the controlling stake of newly privatised banks fragmented among a larger number of “industrial investors” (manly other banks, jointly managing the companies).