STATE-OWNED ENTERPRISES AND PARASTATALS (SEPs) POLICY DISCUSSION - - PowerPoint PPT Presentation

STATE-OWNED ENTERPRISES AND PARASTATALS (SEPs) POLICY DISCUSSION

Hugo Caneo Consultant World Bank

hcaneo@fen.uchile.cl hcaneo@gmail.com hugo@caneoabogados.cl

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Chilean SOE sector Chile faces a profound crisis of trust regarding government, traditional institutions, political parties, corporations, etc. (83% of Chilean population do not identified with any political party). Chile is growing, but a very low rates, mostly unknown in the recent 30 years. Results: Unemployment level has grown. Poverty has grown. Codelco (SOE producing cupper) has suffered losses. Probably if Chile does not recover the previously known growth rate the trust crisis would become deeper.

Chilean SOE sector As we know the main problem of the Economy is dealing with scarce resources. Therefore, the use of those scarce resources should be efficient and effective, in order to satisfy as much population´s needs as possible. SOEs should be a tool in order to satisfy population´s needs or providing resources for such satisfaction, providing goods and services, in a efficient and effective manner. Otherwise, their existence would be at least doubtful. Why? Because they use resources that could be multiple and important uses: education, housing, health, logistics, etc.

SEPs sector What to expect from SEPs:

• Efficient use of resources and in the fulfillment of their goals.
• If their goal are producing profits, the latter should be the highest
• possible. On the other side if they have to perform purposes that

produce deficits, they should be the lowest possible.

• Governed by council or boards, comprised by the best possible
• members. No rock stars, good teams.
• Governed by boards whose members have been selected on a

basis of merit.

• Governed by members that have been appointed in an objective

process with no political interference. REASON: The closer the government in their selection, the more probable any SEP problem would be attributed to the government.

• Being producers of richness.

Chilean SOE sector What to expect from SEPs:

• Boards selects and dismiss management. BECAUSE it is

responsible of the good performance of the SEP.

• Boards monitor the management performance
• Boards are the corporate structure to which any kind of public

police maker should relate, not the management.

• Appointment processes should be:
• Well structured
• Previously known.
• Use of Head hunters is advisable
• Transparency is the key

How the good things could be kept on time In order the processes and their benefits could be sustainable on time, it is necessary that a robust legal and institional framework provides the support to this system, regarding:

• Option centralized and decentralized models.
• The

centralized legal entity functions, powers and responsibilities.

• The power to appoint and dismiss boards or council´s

members.

• The capacities to assess SEPs performance.
• The power to act as owner, determining objectives, goals and

metrics. Chile is characterized by being a mixed system: Most of SOEs are under a Centralized entity, but some of the most important are under the policy maker.

WHY DO WE NEED SOEs?

Ø As counterparts and regulators regarding essential facilities, e.g., harbour companies. Ø For managing strategic assets such as Codelco or Enap, providing money to the State. Ø For insuring diversity and pluralism in media (TVN). Ø For facilitating access to financial markets to certain segments of the community (Banco Estado). Ø For protecting small producers from problems in the formation of prices´ process (Cotrisa). Ø National security (Enaer, Asmar and Famae). Ø For issuing public documents (CasaMoneda).

RELATIONSHIP WITH PRIVATE SECTOR

The legal and regulatory framework for SOEs ensure a level-playing field in markets where SOEs and private sector companies compete in order to avoid market distortions. The above explained situation explains why most SOEs have been structured as corporations or other companies. SOEs, even those created by law, are subject to the same rules applicable to private listed corporations. Furthermore, SOEs have a stronger regulatory burden since they are subject to the Transparency Act, and directors and managers are subject in certain cases to responsibility as public officers; control of Congress and the General Comptroller (CGR).

RELATIONSHIP WITH PRIVATE SECTOR

SOEs face competitive conditions regarding access to finance and regulations:

• They request financing from private banks.
• The State is restricted to certain amounts for granting indebtedness to
• SOEs. Case in which a specific agreement must be subscribed between

SEP and the SOE.

• SOEs must comply the same disclosure requirements as private listed

corporations.

• SOEs in which the State participates as shareholder it has the same

rights as any private shareholder.

• SOEs are subject to a larger transparency standards than private similar

companies.

An overview on Chilean State Owned Enterprises sector State owned enterprises (“SOEs”) develop and participate in business activities in strategic sectors of the economy such as transport and harbors (12), mining (3), banking (1), media (1), agriculture (2), utilities (3), services (3), oil field exploitation and refining (1), money printer (1) and defense (3). Some of those SOEs can take the form of corporations, partnerships and a special form, not available to private companies, called “created by law”. An important number of them are under control of the Sistema de Empresas –SEP, agency responsible for exercising

• wnership rights, but some of the

most important are under a decentralized model Chilean law uses a formal definition of enterprise, applicable to SOEs and private sector companies (Labor and Commercial Code).

SOEs

The SOEs cannot implement any kind of commercial activity unless it has been previously approved by a law (special quorum for such approval). The concept of SOE is a formal one, SOEs are those enterprises specifically approved by law (20). The law that creates the SOE defines their business purpose, corporate governance, board remuneration,

• etc. (SOEs created by law).

The other SOEs are those approved by law, but that are incorporated and structured as private companies (10 corporations or joint stock companies, 2 of them in liquidation process). All of them are subject in the development of their businesses to private law, but also they are the supervision supervision of the Securities Regulator and of the General Comptroller (CGR).

SOEs relationship with the State. 22 of the 30 SOEs are subject to SEP´s evaluation of their performance, strategies and goals, as well as appoinment and evaluation of their boards. SEP is a committee of the Corporation for the Promotion and Production (CORFO). It has no a strong legal framework. Furthermore, SEP exercises rights as a minority shareholder, without evaluating the management, in certain private utilities companies.

Empresas Públicas por sector de la economía

Sectors Banking

• B. Estado

Defense Famae Enaer Asmar Transportation 10 Puertos EFE Metro Correos Mining Codelco Enap Enami Services Zofri Polla C. Moneda Cotrisa Media TVN Water L. Peñuelas Econssa

Correos

CORPORATE GOVERNANCE OF CHILEAN SOEs UNDER SEP

State-Owned Enterprises

Board of Directors Authority

SEP´s code and guidelines:

Advice of Good Practices SEP as representative

• f the State directly and

indirectly

SEP’s ROLE ON SOEs: GUIDELINESS FOR CORPORATE GOVERNANCE AND SEP CODE

Rationale behind the duties of SEP: ØExpertise representing the Rights of the State as owner ØAdding vision beyond the particular one of each company ØCentralization of monitoring performance of the SOEs ØCoordination with Sectorial Authorities affecting SOEs (i.e. Transports, etc) ØUnification of management styles, reporting duties, goals. ØCreating scale economies (e.g. 10 harbour companies) ØThe appointment and removal of members of the board directors in our SOEs made by SEP on a basis of labor experience and professionalism and

• bserved formal rules called Procedure for Selection and Appointment of

Company Directors in SEP. ØSEP follows the recommendations listed in the OECD Guidelines on Corporate Governance.

Good Board of Directors (teams, no rock stars) Composition of the Board (balance and coordination) Knowledge of the business (time devoted to the enterprise) Accountability of board of directors (SEP) Clear focus and goals (SEP advice) Strategy (Board) Efficiency and Competitiveness (Board) Administrative and Financial Integrity (Board) Transparency (Board) Social Responsibility (Shared value) Importance of Labor Relationships Environment Commitment

Guiding Principles

GENERAL FRAMEWORK AND GUIDING PRINCIPLES

LEGAL STATUS OF SOEs

Creating Value for the State The Owner-State Present Accountability

• f

Boards of Directors Enforcement by the Chilean Stock and Exchange Commission (SVS)

REGULATORY STATUS

SEP´s FUNCTIONS The main functions and powers, to fulfill their purposes are as follows:

• A. Acting as technical advisor of the State in relation to the

management control of SOEs that relate to the government through various ministries and where expressly required to do so (10 Port Companies, EFE and CORREOS).

• B. Representing the CORFO´s shareholder rights in certain SOEs.
• C. Appoint Directors, Presidents and Vicepresidents, in certain

SOEs created by law.

• D. Prepare and submit an annual report to the President of the

Republic and the Congress.

• E. Negotiating Covenants with SOEs obtaining guarantees from

the State.

SEP

Guidelines

ENTERPRISE (Board) STRATEGIC PLANNING ANNUAL BUDGET GOALS

SEP and SOEs

Approval Strategic Plan and Annual Budget Monitoring of the management

Public Policies: Sectorial Authorities

CORPORATE GOVERNANCE The most important challenge for corporate governance of SOEs is finding the balance between State´s fulfillment of its ownership role and following certain public interest targets. SEP´s goals: maximize the net economic value of SOEs, and reducing the impact of deficits in the state budget, while implement the best practices of Corporate Governance in its SOEs. Not losing money, if possible earn money. If public objectives are required, disclose them. Separate accounts. Funding clearly from the State, other alternative available. KEY: Board is responsible for their decisions responding with its owns assets (family wealth). Boards and management are responsible for SOEs. Therefore, everyday they should make things better.

SEP’s ROLE ON SOEs: GUIDELINESS FOR CORPORATE GOVERNANCE AND SEP CODE

Guidelines prepared by SEP, for incorporating the best corporate governance practices in SOEs, such as:

• Boards and their chairmans
• Duties of directors (legal, regulatory or statutory)
• Conflict of interest
• Audit Committee
• External Auditors
• Internal Auditors
• Enterprise Risk Mangement
• Fraud
• Information security
• Prudential Accounting Principles
• Code of Conduct
• Social Corporate Responsibility and shared value
• Human Resource Management
• Transparency

RESPONSIBILITIES OF THE DIRECTORS

No matter how they are structured SOEs are run by a collegial body composed of 3 or more directors who must complied with duties such as: ØDuty of care ØDuty of loyalty (no conflict of interest) ØDuty to be informed ØInsider trading ØTransparency Act ØDeclaration of interest and assets

• Internal Auditors. Depend funcionally from the management of

the SOEs

• External Auditors. Appointed by SEP in those SOEs under its
• monitoring. In other cases they are appointed by the Board.
• Surveillance of the Securities Regulator (SVS)
• Legality Control by the Contraloría General de la República

Control Mechanisms:

Control and Internal / External Auditing

Kind of Audit Activities:

• External auditing of financial statements. They are published
• nce a year together a summary of the main facts of the SOE.
• Auditing activities by the Contraloría General de la República

published on the Website of the latter

• Internal should be known by the Board.

SUPERVISION: CHILEAN SECURITIES AND EXCHANGE COMMISSION

Our SOEs are, also, under supervision by the Chilean Securities and Exchange Commission (SVS) . SVS has among its main objectives to ensure transparency of the markets, through timely and wide dissemination of public information maintained and be involved in understanding and education of investors, policyholders and the general public. Three roles of the SVS: ØSupervision ØNormative ØPunishment

SUPERVISION: CONGRESS AND GENERAL COMPTROLLER OF THE REPUBLIC

Congress has two control functions over SOEs ØObligation to report and submit reports on financial statements ØAnd request any information from companies General Comptroller of the Republic ØCertain transparency requirements ØAudit of the use of public resources

SUPERVISION: DISCLOSURE AND TRANSPARENCY ACT ØEach SOE publicly reports quarterly its financial statements. ØSOEs are obliged to keep certain mandatory information – applicable regulations and bylaws, information of the board and management, their incomes, etc. - in their websites. (active transparency). ØSEP annually reports the management of companies to both the President of the Republic and Congress. And quarterly to the Ministry of Finance, Economy and Transportation.

Chilean SOE sector Structure for board or council appointments: Creation of profiles according to detected needs, new scenarios to face, or other business reason (not only operational, but also sustainability.) Definition of written record of persons or officers responsible of the process, Prior definition of the process steps. All the above mentioned should be contained in written records. All the process should be transparent, BECAUSE is the only way in which accountability could be achieved.

How make changes occur Always crisis provides good opportunities, specially if resources have been lost.

How make changes occur It is good keeping in mind that responsibility (civil, administrative or criminal) is part of the job, either by acts or omissions. Therefore, professionalism and having the best possible players in this system is a key element.

How make changes occur Identify and keep in contact some champions and allies for making changes.

How make changes occur The World is becoming smaller and more competitive, not making changes for being better, is a waste of precious time and permitting

• thers gain ground that could be very difficult to regain.

How make changes occur Communities are becoming more demanding, therefore is better making changes in order to being prepared to those demands.

Thank you for your attention!