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 PortfolioHungarian State Holding Company (HSHC)5 September 2011

Executive summary

• 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 state-

owned 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

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

Exercising state ownership rights - 3 different ownership entities remained

4

Hungarian State Holding Company (HSHC)

National asset management framework:establishing HSHC

• Company limited by shares under Hungarian Company act

• non-distributable shares

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

Hungarian State Holding Company: moving towards the centralized model.

Centralized ownership model

National Land Fund Management

• It managed state owned lands.

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Facts and figures of state ownership

NUMBER

HSHC SOE PORTFOLIO 415

MANAGED DIRECTLY BY HSHC 358

FUNCTIONING COMPANIES 214

-majority owned 124

-minority owned 90

UNDER VOLUNTARY DISSOLUTION

60

UNDER LIQUIDATIION 84

MANAGED BY OTHER ENTITES (asset management contrats)

57

• The functioning companies have

a total balance sheet of €10.4

billion in proportion to HSHC

ownership.

• Total book equity value of

majority owned HSHC SOE

portfolio is € 5.6 bn

• Not homogenous portfolio

• HSHC has the right to deal with

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).

COMPANIES

REAL ESTATES

SOE assets at HSHC

Manufacturing

Electricity

Culture

Top

AgribusinessUtilities

Transportation

Environmental

Major enterprises at HSHC

Sport

Hungarian state owned asset management: international comparison

• 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.

8

SOE employees as % of total employment in 2010

Source: OECD

Total assets of majority owned SOEs in sectoral breakdown - 2011

Primary sectors Manufacturing

Finance

Telecoms

Electricity and gasTransportation

Other utilities

Real estate

Other activities

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 non-commercial activities

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)

Back to basics: defining the asset management strategy

Strategy and operation

Layers of SOE strategic thinkingLayers of SOE strategic thinking

Strategy Operation

Principles of decision-making

Executing the individual strategy

Portfolio-level recommendations

Critical strategic points

INDIVIDUAL COMPANY

STRATEGIES

BUSINESS-ORIENTED

APPROACH

RISK MANAGEME

NT

CORPORATE

GOVERNANCE

Strategic points 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

Disfunctional companies with no future perspective

Due diligenceAccounting former managements

Contracting out from unfavorable decisions and commitments

Corporate governance

Discontinuing 31 BoD at companiesSaving EUR 500 000 from less bodies at company level

Cleaning up the portfolio

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

Management

Auditor

Supervisory Board (peremptory)

HSHC portfolio manager

HSHC Controlling Department

HSHC Supervisory Department

Internal audit

CEO of HSHC

Head of corporate portfolio

Governance and company monitoring

Transparent company operation for the

owners

Monitoring System

Corporate

Early-warning system

Feedback Accountability if plans cannot be

executed properly

Understanding operation

Recognising anomalies

Plans and execution

Recognising operation

that is not in line with

goals

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. Streamlining businesses2. Reducing overlapping activites and redundancies3. Centered support services4. Focusing on core competencies5. Information an control over minor companies

Results:

- reduced OPEX

- reliable support services

- stronger controlling

- portfolio level net cost reduction

Minister of National Development

Board of Directors

Chief Executive Officer

General Deputy CEO of Real Estate Portfolio

Supervisory Board

HR and SecurityCFOChief Legal Counsel

Deputy CEO of Corporate Portfolio

Organizational chart of HSHC

Decision-making structures of SOEs

HSHC

Board of Directors

Chief Executive Officer

Supervisory Board

HSHC

Chief Executive Officer

Supervisory Board

HSHC

Peremtory Supervisory Board

Chief Executive Officer

Companies with BoD Companies without BoD

Further steps to improve governance

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

• #1 electricity power generator in Hungary• #1 wholesale electricity trader in Hungary• 99,9% owner of the Hungarian power grid company

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Coal plant

Nuclear power plant

Heating plant

Gas turbine plant

Wind power

Coal mine

Paks1,970MW

Hungarowind23MW

Litér120MW

Sajószöged120MW

Miskolc63MW

Lőrinci170MW

Észak-Buda50MW

Vértes240MW

Márkushegy 0.75mt

Total generation capacity: 2777 MW

2009 2010

Number of employees 8 534 8 090

Revenues € 2 144 € 2 083

EBITDA € 431 € 418

Profit before tax € 315 € 306

Net profit € 225 € 218

Total assets € 3 008 € 2 923

Equity € 1 809 € 1 757