Can the market value state-owned enterprises without privatizing them? An application to natural resources companies

Abstract

State-owned enterprises may be strategic for many countries. For political or practical reasons some of these enterprises may remain wholly state-owned (WSOE), like PEMEX in Mexico or CODELCO in Chile. For this group, the lack of traded equity now prevents a market-based valuation. A market price would help provide an estimate of the WSOE's contribution to future fiscal income. It may also help keep managers more accountable and signal changes in the behavior of entrenched groups. Finally, a market valuation would also help valuing discoveries as well as research and development projects that are slow to yield profits. This paper presents a novel mechanism to create a market value for WSOEs, but without privatization. The method relies on independent parties trading a synthetic security. The security replicates the future cash flow that the WSOE pays to the government. It gives replicated cash-flow rights but no control rights of the WSOE. The document discusses methods to implement this principle and its potential challenges. Preliminary calculations show that issuing 3–10% pseudo-shares of some salient WSOEs could generate a meaningful valuation. This, without compromising state ownership of assets and decisions.