Hybrid Capital Structures and the Governance of State-Owned Companies: The Case of SABESP

Abstract

This paper develops a case study about a Brazilian company with a very interesting governance and capital structure that mixes public and private elements: SABESP, a monopolist water supplier controlled by the state of Sao Paulo that is now listed and traded in the Sao Paulo Stock Exchange. With a reputation for efficiency, it is considered a corporate benchmark for efficiency and a success story. It was the first Brazilian state-controlled company to be listed in the Novo Mercado segment of the Sao Paulo Stock Exchange (BOVESPA). The decision to go public and abide by more strict corporate governance rules without, however, being privatized led to a very interesting case of a company with hybrid ownership structure that, albeit being a colossus that deals with huge sums of money and implements very sensitive public policies, has been kept relatively well isolated from negative incentives, is turning profits, and has had a good performance in the stock exchange. To present the analysis, the paper will also try to provide a theoretical framework that would allow one to understand how state ownership and hybrid ownership forms can help to solve more general governance problems. The claim the study advances is that, since private ownership and state ownership lead to different governance arrangements that are more or less efficient and generate more or less surplus for the actors involved, there may be governance problems that would be easier to overcome if the state owned the firm or, at least, if it places itself amongst the residual claimants. Thus hybrid forms of ownership may appear or be adopted as a response to the environment under which a corporation operates, which means that they may not necessarily be inefficient. The proposed analytical framework will blur two traditional dichotomies. First, it will dissolve the strict separation between state-owned and private-owned companies. The intuition behind this is that governance forms are more flexible and varied than this pair of opposite classifications may imply. On the one hand governments can control private assets and private organizations in many degrees, whether they own directly such corporations or not. On the other hand, corporations that are supposedly state-owned may be at the mercy of private interests, or they may be dependent on external shareholders. In consequence, finding an optimal ownership structure for the firm becomes a problem of institutional design. The second one is that the framework to be proposed will soften the separation between “inside” and “outside” the company. In this sense, instead of seeing the firm as a dark monolith, the paper will identify it with a governance structure composed by public and private relationships.