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Hungarian State Holding
Company:Governance of
state ownership
Presentation to the High Level Meeting of the State
Ownership Authorities
Csaba Polacsek Dr.
Deputy CEO, Head of Corporate Portfolio
Hungarian State Holding Company (HSHC)
5 September 2011
Executive summary
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State ownership plays an important role in the Hungarian economy. The
state-owned companies have a significant effect on GDP.
State ownership is a significant tool to execute government public policies.
In smaller states ownership position is of utmost importance compared to
large states to control market mechanisms and pricing failures.
Privatisation phase is over after the socialist regime.
Bad governance practices (ie: corruption) of state owned assets were in the
limelight: focusing on good governance.
Applying private equity best practices is a must when it comes to stateowned asset management.
Asset management – and within this the regulation of state assets and
supervision of their ownership – falls within the Ministry of National
Development’s remit.
Expanding business-oriented thinking
HSHC should improve the reputation of state-ownership.
STATE CAN BE A RESPONSIBLE OWNER!
Ownership entities of state owned enterprises
Exercising state ownership rights - 3 different ownership entities
remained
Hungarian State
Holding Company
• Majority owned Companies in
different sectors e.g. energy,
postal, lottery, transportation
etc.
• Several minority shareholdings,
including listed companies
National Development
Bank
• Mainly financial or financial
related companies
• Other specific sectoral areas
– e.g. forestry and
infrastructure
Entities declared by
other law
• Specific and large
companies
• their ownership entities are
mainly ministries
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National asset management framework:establishing HSHC
Hungarian State Holding Company: moving towards the centralized
model.
Hungarian Privatization
and State Holding
• Former holding and
privatization company
• Company limited by shares
Treasury Property
Directorate
• It managed state owned
real estates
• Budget institution
National Land Fund
Management
• It managed state
owned lands.
Centralized ownership model
Hungarian State Holding Company (HSHC)
• Company limited by shares under Hungarian
Company act
• non-distributable shares
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Facts and figures of state ownership
• The functioning companies have
NUMBE
R
HSHC SOE PORTFOLIO
C
O
M MANAGED DIRECTLY BY HSHC
P
A FUNCTIONING COMPANIES
N
-majority owned
I
-minority owned
E
UNDER VOLUNTARY
S
415
billion in proportion to HSHC
ownership.
358
214
• Total book equity value of
majority
owned
HSHC
SOE
portfolio is € 5.6 bn
124
• Not homogenous portfolio
90
• HSHC has the right to deal with
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DISSOLUTION
UNDER LIQUIDATIION
84
MANAGED BY OTHER ENTITES
(asset management contrats)
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REAL ESTATES
a total balance sheet of €10.4
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inherited companies
• HSHC liquidates companies that
have no future perspective
14% of the state real estates is
directly managed by HSHC (Total
real estate value is € 31 billion).
SOE assets at HSHC
Major enterprises at HSHC
Electricity
Utilities
Environmental
Top
Culture
Transportation
Agribusiness
Manufacturing
Sport
Hungarian state owned asset management:
international comparison
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SOE sector is a significant employer.
Accepted and applied international
asset management best practices.
Continuous development of national
asset management practices.
Centralised asset policy at ministry level
with
more
ownership
exercising
institutions.
SOE employees as % of total employment in 2010
Total assets of m ajority ow ned SOEs in sectoral
breakdow n - 2011
Other activities
Source: OECD
Primary sectors
Manufacturing
Real estate
Other utilities
Finance
Telecoms
Transportation
Electricity and gas
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Adequacy of state ownership policy
• Deciding what level of state ownership is adequate should be
part of the national strategic thinking.
• Regarding contolling market failures in smaller states, the
ownership position is more important than regulatory position.
• Via ownership position the policy makers will have better
access to market information and ‘drivers’ of pricing.
• The so called ‘spontaneous privatisation’ (without any
strategic consideration) is one of the biggest problem in
Hungary.
• Foreign background multinational companies chanelled out
their profit from Hungary (low profit reinvestment level)
• Keeping the natural monopolies (water supply, electricity, gas
supply) with state-controlled ownership would have been
important.
• Delivering quality public services is easier when the state has
a strong ownership position.
Commercial and non-commercial objectives
• Commercial and non-commercial activities are
divided and accounted separately
• Non-commercial public benefit activites must be in
line with the company’s articles of association
• Subsidies comply with state-aid regulation
• Nonprofit business associations may engage in
business operations only in the form of ancillary
activities
• The State Aid Monitoring Office has the task to
ensure that state aid in Hungary is granted in
accordance with EU regulation
• Strict policies to avoid overcompensation of noncommercial activities
Asset management strategy
Back to basics: defining the asset management strategy
• Instead of administrative management the focus is to create the
framework for business-oriented asset management.
• Goals to fulfil during asset management: effectiveness, having
economic value added decisions, being cost sensitive
• Main focus is to reinforce accountability and corporate governance
• Strategic thinking at operational level is a neccesity
• Before having a comprehensive strategy there were alarming tasks
to do:
» Due diligence of companies
» Replacing managements at SOEs where neccesary
» Understanding contractual frameworks of SOEs
(especially long-term commitments)
Strategy and operation
Layers of SOE strategic thinking
Strategy
Comprehensive
asset strategy
Asset strategy
for SOEs
Individual company
strategies
Operation
Principles of decisionmaking
Portfolio-level
recommendations
Executing the individual
strategy
Critical strategic points
Strategic points
INDIVIDUAL
COMPANY
STRATEGIES
BUSINESSORIENTED
APPROACH
RISK
MANAGEMENT
CORPORATE
GOVERNANCE
Target
•Strategy is a basic document
•Strategy is based on the business model of
the company
• Mining out possibilities
• How to find solutions
• Risk map
• Risk management system
• Broad corporate governance
recommendations
• Roles and responsibilities of management
First steps before building up the strategy
Liquidating
companies
Due diligence
Corporate
governance
Disfunctional companies with no future perspective
Accounting former managements
Contracting out from unfavorable decisions and
commitments
Discontinuing 31 BoD at companies
Saving EUR 500 000 from less bodies at company level
Cleaning up the portfolio
Terminating
companies
Between September
1990 and April 2010
Between May 2010
and May 2011
Liquidation
63
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Voluntary dissolution
46
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Selling minority
stocks
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Selling minority stocks is in the pipeline: 50 minority stock to
be sold until the end of 2011
Be the first to know: recalibrating corporate controlling
Stronger controlling system
Private equity management type controlling
CEO of HSHC
HSHC Controlling
Department
Supervisory Board
(peremptory)
Internal audit
Head of corporate
portfolio
HSHC
portfolio
manager
Management
HSHC Supervisory
Department
Auditor
Governance and company monitoring
Recognising anomalies
Transparent company
operation for the
owners
Understanding
operation
Early-warning
system
Corporate
Monitoring System
Recognising
operation
that is not in
line with
goals
Accountability if
plans cannot be
executed properly
Feedback
Plans and execution
Central support for operation
Joint procurements
Portfolio-level regulations
(investment regulation, renumeration policy, harmonizing accounting policies)
Knowledge-base
- Business plan guideline
- Regular workshops and peer reviews
Corporate governance best practices
Shared-service centers
Goals:
1.
2.
3.
4.
5.
Streamlining businesses
Reducing overlapping activites and redundancies
Centered support services
Focusing on core competencies
Information an control over minor companies
Results:
- reduced OPEX
- reliable support services
- stronger controlling
- portfolio level net cost reduction
Organizational chart of HSHC
Minister of National Development
Supervisory Board
Board of Directors
Chief Executive Officer
General Deputy CEO of
Real Estate Portfolio
Deputy CEO of
Corporate Portfolio
Chief Legal
Counsel
CFO
HR and Security
Decision-making structures of SOEs
Companies with BoD
Companies without BoD
HSHC
HSHC
Supervisory
Board
Board of Directors
Supervisory
Board
Chief Executive Officer
Chief Executive Officer
HSHC
Peremtory Supervisory Board
Chief Executive Officer
Further steps to improve governance
Developing sustainable and measurable
business models
Structures built on portfolio synergies
Portfolio clean-up
Corporate governance check-list for SOEs
Annex 1:
Example of real estate management
• The Palace is one of the most
important, largest monuments of
Hungarian Palace architecture. Its
builder, Count Antal Grassalkovich I
(1694-1771) was a typical figure of the
regrouping Hungarian aristocracy of the
18th century. He was a Royal
Septemvir, president of the Hungarian
Chamber, and confidant of Empress
Maria Theresa (1740-1780). The
construction began around 1733, under
the direction of András Mayerhoffer
(1690-1771) a Salzburg builder.
• In 2009 an enormous renovation project
was launched in order to restore the
major part of the building that will serve
as the most important summit building
during the Hungarian EU Presidency in
2011.
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Annex 2: Example from the company
portfolio
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#1 electricity power generator in Hungary
#1 wholesale electricity trader in Hungary
99,9% owner of the Hungarian power grid company
Total generation capacity: 2777 MW
Miskolc
63MW
Vértes
240MW
Lőrinci
170MW
Sajószöged
120MW
Hungarowind
Észak-Buda50MW
Márkushegy 0.75mt
23MW
Litér
120MW
Coal plant
Paks
1,970MW
2009
2010
8 534
8 090
€ 2 144
€ 2 083
EBITDA
€ 431
€ 418
Profit before
tax
€ 315
€ 306
Net profit
€ 225
€ 218
Number of
employees
Revenues
Nuclear power plant
Heating plant
Total assets
€ 3 008
€ 2 923
Gas turbine plant
Equity
€ 1 809
€ 1 757
Wind power
Coal mine
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