Author: Ivars PInkulis, Prudentia partner
This year’s TOP101 first ten enterprises include five Latvian state-owned enterprises with total value approximately 4 billion EUR, but totally in TOP101 – 16 enterprises. These figures, on the one side, show the essential influence of the Latvian state-owned enterprises on economics, on the other side – force to ask a question – does the state use efficiently its resources (capital) in the free market situation in this manner, or is there another way how to enhance the growth of the state enterprise value more rapidly.
TOP101 is the sole information source enabling to trace the value changes of the Latvia’s most valuable enterprises from year to year. And in this case, unfortunately, a fact should be admitted that the total value of the enterprises owned by the Latvian state has increased only by 14% in the last 5 years whereas the total value of the private companies – by 28%, or, the difference is twice. Besides, the percentage of the Latvian state-owned enterprise total value in TOP101 decreased from 28% to 25% during these 5 years. At the same time the practice of the closest neighbouring countries shows that the state-owned enterprises going public on the stock exchange is a way how the state may reach a leap in the enterprise value without losing control over the enterprise – both by attracting financial resources for more rapid enterprise development and motivating the enterprises to act in line with the best corporate governance standards.
It is evident that already now a large part of the Latvian state-owned enterprises included in TOP101 (inter alia, Latvenergo, Lattelecom, Latvijas Mobilais Telefons, Latvijas Pasts, Rīgas Siltums, AirBaltic Corporation) acts in free market conditions, these enterprises find themselves in advantageous situation to be successfully listed on the stock market. Although the growth of enterprise value for a publicly listed enterprise is easily to be measured, the most important benefit at national level is expected from activization of the national capital market, inflow of the direct foreign investments and increase of the paid tax amounts as a result of enterprises’ more rapid development. However, the fact should be noted that the necessary political decisions for launching the public offering of the state-owned enterprises on the stock exchange have not been adopted in Latvia so far, and the maximum positive impact of the state-owned enterprises on the national economics is not reached yet.
However, this has been discussed for years in Latvia, while it has already been started in Lithuania and Estonia. Thus, the shares of the five state-owned energy industry enterprises in Lithuania are successfully listed on the stock market, and the government owns the controlling stake or ensures control over the key decisions. Whereas the Estonian government has taken first serious steps towards more efficient use of the assets invested in their enterprises and increase of their value – in June of 2018 the Estonian port authority company JSC “Tallina Sadam” got successfully publicly listed on the Tallinn stock exchange (the functions may be similar with the Freeport of Riga). And it looks like that the Estonian government is not going to stop with the public listing of JSC “Tallina Sadam” in view still larger public share listing can happen in the first half of 2019 where even up to 49% of JSC “Eesti Energia” daughter company JSC “Enefit Green” shares will go public on the stock exchange.
The public offering of JSC “Tallina Sadam” is considered to be an entire success story in Estonia because, in addition to attracting more than 100 million EUR by the enterprise in such a way for the development of Estonians ports, positive “side effects” have been obtained to cause a positive push for long-term growth of the Estonian economy. The most important of these side effects can be mentioned: 1) successfully established precedent for further public listings for state-owned enterprises; 2) opportunity is provided for the Estonian people, pension foundations and financial investors to invest in a successful enterprise owned by their state; 3) placement of Estonian capital market on the investment map of the international institutional investors. On the basis of this public share listing the Estonian government decreased its controlling interest up to 67% in JSC “Tallina Sadaam” , however, still exerting control over the most important issues related to the enterprise development. At the same time the share price and accordingly – the value of the enterprise has grown already by 27% since the moment of going on the stock market – during less than 4 months.
Whereas JSC “Enefit Green” which engages in energy production from renewable energy resources in the whole Baltics, plans to attract 200-300 million EUR as a result of IPO in order to finance the further enterprise development and refinance the current liabilities. The estimated IPO result – the enterprise JSC “Enefit Green” will continue to be under the Estonian government’s control and simultaneously – will have abundant financial resources to improve its competitiveness in the Baltic states.
And another thing is essential. By making the state-owned enterprises public and part of their shares listed on the stock exchange, each Latvian resident is provided an opportunity to become a shareholder of these enterprises. This is a chance to obtain regular and important information of the activities of the enterprise, to take part in adoption of decisions which are important for the enterprise. This also would create a developed active civil society, promote better dialogue among large, significant state-owned enterprises and the society.
After assessing the Estonia’s recent experience on listing the state-owned enterprises on the stock exchange, it is evident that more than 2 rabbits are hit with one shot. And, although the economic benefit from the public listing of the state-owned enterprises on the stock exchange is obvious, in its essence it is initially a political decision, thus it will depend only on the government in the subsequent 4 years whether the state-owned enterprises in Latvia will be able to use the advantages of the free capital market and ensure the leap in state-owned enterprise value.