Public investment in private companiesManuel Romera Robles placeholder image

Some governments have decided to support their strategic private companies hit by COVID-19. The sector where this movement has been clearest has been commercial aviation, which has seen its income and activity reduce almost completely in the worst moments of the pandemic.

In Europe, Air France-KLM, Lufthansa, Alitalia, and to a lesser extent Iberia, have received public capital through different financial instruments to guarantee their survival in this crisis. The same has happened in the United States.

Specifically, the government of Spain approved a few days ago additional guarantees for € 40,000 million (around US $ 45,300 million) to the Spanish business fabric through the ICO (Official Credit Institute), so that they have greater investment capacity, and promote thus to economic activity. They are added to the € 100 billion (US $ 113,000) mobilized in March.

Additionally, it also approved the creation of a fund to support the solvency of strategic companies of € 10,000 million (US $ 11,300) for investment in the property of private companies, with the state company for industrial participations (SEPI) taking care of its management. attached to the Ministry of Finance.

This will allow the State to own part of the capital, temporarily and temporarily, of strategic private Spanish companies. Its objective is to improve the solvency of large companies, and in vital sectors of the economy, at a time when the viability of many is being compromised by the pandemic.  

One of the most important keys to the rules of this aid fund is that companies request this public financing. It cannot be the State that on its own initiative decides to enter the capital of these companies. In addition, it must be a last resort solution on the part of the companies, that is, it must not be an interference of the public power in the private one.

Once the entry of the public fund into the capital of private companies has been requested, the State must resolve the requests within a period of no more than six months, and new legislation will allow the State to be exempted from launching a Public Offering of Acquisition (OPA) for all of the capital that, in normal terms, it is mandatory to launch when it exceeds 30% of the capital of the purchased company.

The reasons that must exist for the State to consider the request for entry into the capital of these protected companies and, therefore, of a strategic nature are fundamentally the following: that they have a social and economic impact, that they are relevant for security, that affects people’s health, infrastructures or communications are compromised or contributes to the proper functioning of the markets.

With this measure, the Spanish government, like the governments of Germany or France, has decided to support its strategic productive fabric with capital injections, both in pure capital, using capital increases, and through hybrid instruments between debt and capital. , such as subordinated debt, equity loans or debt convertible into equity.

This financial instrument will be managed in accordance with the criteria for state participation regulated by the European Commission, in the case of Europe, so as not to incur the illegal and dreaded “state aid”. However, this pandemic has made countries like Germany, which has always been very tough with aid of this nature, have proposed allowing the existence of this type of corporate recapitalization funds with public money.

Key to ensure that public capital is not used to nationalize companies for political purposes

This last aspect is vital for these investments to be successful. These holdings must be managed in exceptional cases, temporarily and by recognition of their need by the company, since, if this is not done, we may fall into the temptation of the public sector entering the private sector with eagerness control and establishment of public management as a catalyst for private wealth. And that is inefficient in the long run, since the best way for companies to function is to have entrepreneurs in charge of business and not states with their political biases.

Therefore, these investments must guarantee a professional management of the investee companies, so that they are not used as an instrument of economic policy. It is key to ensure that these aid, which may be necessary in times as difficult as the one experienced due to the COVID-19 pandemic and its economic consequences, are not used to nationalize companies for political purposes. And, of course, that the benefits of future sales of capital or dividends generated by investments will be paid into the Public Treasury.

The protection of the productive and strategic national fabric so as not to leave it in hostile foreign hands, in such an exceptional moment as this, must maintain the right balance between the freedom of the movement of capital and the protection of the nationality of the capital of the companies.

The German approach, to block acquisitions of more than 10% of the capital in areas considered “sensitive” such as defense and telecommunications, robotics, artificial intelligence and biotechnology, when the operation represents a danger to the public safety of Europe and not only of Germany is an interesting model.

Spain, or other Latin American countries could value this model at a time when national companies have lost much of their value due to the COVID-19 crisis and, therefore, are likely to end up being acquired by companies of economic giants .