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COMMISSION OF THE EUROPEAN COMMUNITIES

Brussels, 22.7.2005

COMMISSION STAFF WORKING DOCUMENT

Special rights in privatised companies in the enlarged Union–a decade full of developments

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EN EN

COMMISSION STAFF WORKING DOCUMENT

Special rights in privatised companies in the enlarged Union–a decade full of developments

TABLE OF CONTENTS

Introduction

1. SPECIAL RIGHTS IN PRIVATISED COMPANIES: A FORM OF RESTRICTION TO THE FREE MOVEMENT OF CAPITAL

1.1. Special rights and the privatisation process

1.1.1. Types of special rights

1.1.2. Justification put forward by Member States

1.1.3. Alternative public measures to safeguard the public interest

1.2. Economic impact of special rights

1.3. The legal framework

1.3.1. Fundamental Treaty principles

1.3.2. Landmark rulings by the European Court of Justice

1.3.3. Pending rulings and infringement cases under scrutiny

2. FROM THE MAASTRICHT TREATY TO ENLARGEMENT: A DECADE FULL OF DEVELOPMENTS

2.1. The starting point

2.1.1. Identifying special rights in the EU in 1997. The starting point for the EU 15

2.1.2. Pre-accession screening in 1999: The starting point for the candidate countries

2.2. 1997-2004 a period of scaling down and abolishment of special rights

3. THE STATE OF PLAY ONE YEAR FOLLOWING ENLARGEMENT

3.1. A wide range of economic sectors of the EU economy still concerned

3.2. The companies involved are important economic actors at national and EU level

Conclusion

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ANNEXES:

1. Special rights: Legal considerations

2. Questionnaire on intra-EU investment

3. List of companies in which the State retained special rights

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Introduction

This report deals with special rights, often referred to as “golden shares”. Special rights are a tool that governments use to retain control over certain decisions in privatised companies. They are often justified by Member States on the grounds that they are necessary to achieve certain policy objectives, usually of a “public interest” nature. Typically, special rights allow the government to veto or hinder changes in the ownership structure of the enterprise or its management and as such, they can interfere with the right of an investor to take a stake in an EU company and participate effectively in its management or in its control as established by the Treaty. Indeed, special rights often infringe the Treaty based freedom of capital movements. Over the past decade, as part of its mission to monitor and abolish restrictions on the free movement of capital in the EU, the Commission has come to identify special rights as an issue of particular relevance for the Internal Market. This is the first time the Commission publishes a report giving an overview of developments in this area since the coming into force of the Maastricht1 Treaty that established the free movement of capital as a basic freedom.

In 1997, the Commission issued a Communication on certain legal aspects concerning intra-EU investment pinpointing the issue of special rights2. It also launched a survey, the same year, to assess the extent to which Member States had been resorting to this practice. The survey showed that important restrictions remained on direct and portfolio investments stemming from special rights that Member States sought to retain in privatized companies. This led the Commission to enter into a dialogue with Member States, which, in some cases, led to the voluntary abolition or modification to the scope of such special rights, while in others it led to infringement proceedings against various Member States. These infringement proceedings ultimately culminated in a series of landmark rulings by the European Court of Justice in 2002, 2003 and 2005 which further clarified the application of the Treaty provisions with regard to special rights. In the meantime, the Commission cooperated successfully on this issue with accession candidate countries and achieved a good level of understanding with those governments on the issues involved. This led to the elimination of special restrictions in a number of candidate countries already before accession. A new survey, identical to that carried out in 1997, was launched in 2004 in order for the Commission to gain an overview of the situation in the EU of 25 Member States.

This first report is an attempt to present the factual evidence on the subject in a comprehensive manner. Indeed, neither the results of the 1997 survey, nor those of the most recent one in 2004, have been made public. Of course, special rights are not the only possible form of restriction to intra-EU investment. Restrictions could exist in the form of obstacles to cross-border transactions on acquisitions of long- and short-term financial assets, obstacles to operations on deposit accounts or on foreign exchanges, as well as obstacles in the field of real estate acquisitions. However, in light of the significant developments over the last decade, a document reflecting on what has been achieved on special rights is long overdue.

Since companies in which Member States retain special rights often play a significant role in the economy, special rights have potentially strong economic implications. Special rights may hinder privatised companies from achieving the full benefits of privatisation, they may distort market-driven cross border activity in terms of direct investment but also in terms of portfolio

1 The provisions of which came into force on 1.1.1994. 2 Communication of the Commission on certain legal aspects concerning intra-EU investment, OJ C 220

of 19.7.1997.

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investment in privatised companies and often prove one of the obstacles to achieving a level playing field in the EU market for corporate control.

The first part of this report presents a short overview of the origin of special rights in the EU, the various types of special rights enjoyed by governments in privatised companies as well as their incompatibility with Community acquis. The second part outlines developments over the last decade up to the moment of enlargement. Finally, part three outlines the state of play in the European Union today, one year after enlargement.

Overall, the report points to a diminishing role for special rights in the EU, with most Member States having achieved marked progress in relinquishing this practice. Given the substantial progress in the regulatory framework most Member States address nowadays an increasing proportion of their general interest considerations through regulation rather than through special rights. In many cases Member States have set out a timetable for relinquishing special rights in the companies concerned. In other cases special rights can be justified by exceptions provided for in the Treaty or are structured in a way that is compatible with EU law. For the residual cases the Commission will have to request additional information and investigate further their compatibility with EU law.

1. SPECIAL RIGHTS IN PRIVATISED COMPANIES: A FORM OF RESTRICTION TO THE FREE MOVEMENT OF CAPITAL

1.1. Special rights and the privatisation process

Special rights typically provide for the state to retain varying degrees of control over a privatised company. These measures have been set up by governments to prevent newly privatised companies from takeovers (most often from companies of another Member State) or to prevent management from taking actions not in line with national government policy for the sector in which they operate. Special rights have a varying lifespan and, depending on the case, such special rights might be linked to government ownership of a single special share, a minority stake, or no participation at all in the company concerned.

1.1.1. Types of special rights

In general special rights grant to the state the right to control changes in ownership and/or veto certain strategic decisions of primarily privatised companies. Today one or more of the following types of special rights are the most commonly used by Member States:

– Exclusive rights to control changes in ownership

Acquisitions above a certain threshold may require government authorization. The government may impose restrictions on ownership in the way of, among others, a cap on the level of foreign investment or a restriction on substantial holdings, by limiting investments and voting rights above certain thresholds.

– Exclusive veto rights on management decisions

Decisions such as the winding-up, merger or de-merger of the undertaking and other strategic corporate management decisions may be subject to government approval.

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The government may veto decisions on the disposal of certain assets and have veto power over specified or significant changes to the constitution or articles of association of the company. In addition, the government may have exclusive rights of appointment, such as the power to appoint members of the Board of Directors, auditors, etc.

Exclusive control and supervision of commitments defined in the privatisation agreement, the so –called “buyer agreements”.

The government may retain a supervisory role in the undertaking, after its privatization, to ensure compliance with specifications on investment levels and environmental commitments as well as employee retention clauses. In some instances, the buyer may be under the obligation to repurchase the state’s special share at a predetermined price, if these commitments are not respected.

A “golden share” is one of the most commonly used type of special right. It is usually enshrined in the Articles of Association of the company, which can be altered only with the consent of the government. The golden share is a share held by the government for a finite or infinite period that enables the state to veto specific events and changes in the company’s structure.

Legislation is another tool used by governments for the purpose of controlling a company after it has been privatized. This can be either a “general framework law” that covers several economic sectors or specific legislation adopted for the sole purpose of imposing restrictions on an economic sector or enterprise. In the case of a “framework law”, the entry into force of the special rights is arranged through a specific decree or decrees for each privatised company.

1.1.2. Justification put forward by Member States

The main reasons put forward by governments for retaining ownership control rights over a company post-privatisation include:

– to ensure that ownership and control of the company does not fall into hostile or undesirable hands (i.e. take-over protection);

– to ensure that the company retains its corporate purpose and jurisdiction of incorporation;

– to prevent the sale of strategic and key company assets while retaining the current corporate structure, purpose and form of the undertaking;

– to ensure that the new owners of privatised enterprises comply with certain commitments included in the sales agreement;

– to guarantee the provision of services of general interest in sensitive sectors of the economy;

– to safeguard public security, public health and national defence.

Not all measures being justified as above are in line with Community acquis. Indeed special rights often infringe the Treaty based freedom of capital movements. This is

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the case, in particular, for measures that imply a discriminatory treatment on the basis of nationality. As regards non-discriminatory measures, they are permitted by EU Law in so far as they are justified by imperative requirements in the general interest and they are proportionate to the achievement of that interest. This interpretation of the Commission has been confirmed in a series of recent landmark rulings by the European Court of Justice.

The movement of a firm from the public to the private sector is an economic policy choice which, in itself, falls within the exclusive competence of Member States (based in Treaty neutrality vis-à-vis Member States’ systems of ownership, Art 295 EC). The Commission has clarified that when a Member State is privatising a company, and when that Member State acts in its capacity as a controlling shareholder, it may apply certain conditions concerning the sale as long as such conditions: (i) are based on specific economic policy objective clearly defined beforehand; (ii) are applied without discrimination; (iii) are limited to the time necessary to achieve the specific objectives; and, (iv) leave no margin for interpretation by the authorities (IP/01/872 of 20 June 2001). However, once the sale of a company has taken place the authorities must desist from intervening further in the privatised company.

It should also be added that in the cases of services of general interest many governments introduced special rights in the privatised companies in the 1990s at a time when it was felt that existing regulation was not adequate. As it is explained in the following section however a number of alternative instruments are now available to Member States to protect the general interest in sensitive sectors.

1.1.3. Alternative public measures to safeguard the general interest

Since Member States had, from the outset, complete ownership and control over companies that subsequently were privatised, they endeavoured early on in the privatisation process to maintain part of that control as the main or even exclusive means to safeguard the general interest or public policy objectives in the companies and sectors involved. However, there exist a number of alternative public measures that can serve the same purpose and which are fully in line with Community acquis unlike most special rights arrangements that often infringe basic Treaty freedoms.

Regulation of corporate activity in certain sectors is the most widely used instrument to safeguard the general interest and the public policy objectives. Regulation has the merit of spelling out clearly the public policy obligations of the company or service provider. Examples include outright national regulation of supply conditions in sectors characterised by natural monopolies, either through legislation or through monitoring by regulators, as in the water sector. Regulation can also be exercised within a concession system, where production conditions are laid down in the relevant legislation, as well as in the tendering conditions and the concession contracts, with the gambling and broadcasting sectors as examples.

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At the Community level, secondary legislation is underpinning the security of supply conditions in specific sectors, such as oil supplies 3. This can supplant the need to retain special rights in national oil companies for safeguarding energy supplies.

Furthermore, in production sectors that were regarded in the past as natural monopolies, recent technological advances have opened the door to new companies and market forces to provide, through competition, underpinned by regulation, appropriate supply conditions. The Community has supported these developments by introducing legislation for a gradual liberalisation of these markets.

In the telecommunications sector, a regulatory framework has been put in place at EU level since 1990, leading to the liberalisation of all networks and telecommunications services as of January 19984 . In the case of the postal sector, the existing regulatory framework5 on common rules for the development of internal and common postal services has opened the market for postal services at the same time that it has introduced a definition of the universal postal service. In the energy sector, the electricity directive6 and the gas directive7 required Member States to open a minimum of 30% and 20%, respectively, of domestic demand to EU-wide competition by 2000. Finally, on 26 June 2003 the Directives concerning common rules for the internal market in electricity and in natural gas respectively were adopted8. These Directives provide for the opening to competition of all non-domestic electricity and gas by 1 July 2004, at the latest, and all customers (including domestic consumers) from 1 July 2007.

The above directives provide a framework for the regulation, by Member States and the Community, of the public service obligations imposed on the privatised undertakings. Specifically, the provisions of the above mentioned directives lay down strictly defined parameters that in the Commission’s view ensure the maintenance of a balance between the respect for competition concerns and the protection of essential public services.

The Commission is aware that the application of community law to services of general interest may raise complex issues. In order to improve legal certainty for the providers of such services, the Commission adopted on 12 May 2004 a White Paper9 on services of general interest. The White Paper sets out the Commission’s approach10 in developing the EU’s role in fostering the development of high-quality services of general interest and presents the main elements of a strategy aimed at ensuring that all citizens and enterprises have access to high quality and affordable

3 Directive 68/414/EEC as amended by Directive 98/93/EC. Directive 72/238/EC. 4 Regulation EC No 2887/2000 and implementing directives. 5 Directive 2002/39/CE amending Directive 97/67/EC. 6 Directive 96/92/EC. 7 Directive 98/30/EC. 8 Directives 2003/54/EC and 2003/55/EC. 9 “Communication from the Commission to the European Parliament, the Council, the European

Economic and Social Committee and the Committee of the Regions. White Paper on services of general interest” COM(2004)374 of 12.5.2005.

10 The White Paper draws from the public debate launched by the Commission Green Paper adopted in May 2003 on the future of services of general interest in the European Union.

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services. Moreover, the Commission is carrying out an annual evaluation of the Community’s policy on services of general interest11.

All the alternative public measures to regulate the provision of services by companies operating in specific sectors normally do not discriminate in terms of nationality of investors. They are more transparent and interfere, to a predictable degree, in the direct management and strategic decisions of the companies involved and only with regard to public policy objectives agreed at EU level. Special rights on the other hand, introduce investor uncertainty about government intentions and can act as a deterrent to direct investment in practice12. Their existence and the way they are exercised tend to restrict acquisitions by strategic investors and may also have an effect on portfolio investment. Therefore it is in the public interest to apply special rights only under narrowly specified conditions, where it can be shown that their justifications are in line with the EC Treaty and ECJ rulings.

1.2. Economic impact of special rights

Special rights may not only infringe Treaty rules on the freedom of capital movement; they also have strong economic implications for the functioning of the Internal Market. Empirical evidence and the academic literature points to the potentially negative impacts of special rights, both at a pan-European level, and at the level of individual companies.

As early as 1988, the Cecchini Report13 provided a fully fledged economic justification for completing the Internal Market. It highlighted that the reorganisation of certain strategic industries along pan-European lines via joint ventures, mergers and acquisitions and alliances would create global players capable of benefiting from the creation of the Internal Market.

Academic research has documented significant improvements in companies’ performance criteria following privatisation, namely in terms of profitability, increased capital investment spending, improved operating efficiency and increase in their work force. However, research has also demonstrated that the presence of special rights in a privatised company has a negative effect on the performance of that company. The failure to transfer complete control and to exercise the right incentives, combined with the uncertainty concerning government intervention and the cost of imposing certain conditions, has an impact on the market valuation of the company and may result in an under-pricing of the company’s shares14. Consequently, government receipts from privatisation may be less than otherwise would have been. At the level of individual companies, special rights can have the

11 “Horizontal evaluation of the performance of network industries providing services of general economic

interest”, June 2004. 12 Two well publicised examples of the 1990s are the French government’s threat to use its golden share

in Elf Aquitaine, an oil company, to prevent a take-over by TotalFina (subsequently approved) and a similar attempt by the Spanish government to prevent the merger between KPN, a Dutch telecom company, and Telefónica, the Spanish telecom operator. These examples demonstrate that while special rights are not often used, they can be sufficient to discourage potential acquisition operators. 13European Commission, 1988, “The costs of non-Europe” (Cecchini Report).

14 Boardman, A.E. and Laurin, C. (2000), “Factors Affecting Stock Price Performance of Share-issued Privatizations”, Applied Economics, 32, 1451-64 and Gompers et al (2001), “Corporate Governance and Equity Prices”, NBER Working Paper.

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effect of sheltering management from market discipline and thereby translate into poorer corporate governance. Unlike the case of regulation where public policy obligations are clearly spelled out and therefore predictable, special rights often fail to provide ex-ante for clear criteria to be used by the government when exercising the discretionary powers granted by special rights, leading thereby to suboptimal management decisions.

With respect to direct investment, EU governments have often opposed in the past the takeover of privatized firms, even when this has involved friendly bids. In doing so, they might have distorted market-driven cross-border activity and hindered the efficient use of economic resources. In a rapidly globalizing economy, cross-border mergers and acquisitions, joint ventures and strategic alliances constitute an attempt by firms to achieve economies of scale and are a response to an ever increasing international competition. At the EU level, special rights represent an obstacle to achieving a level playing field in the EU market for corporate control because companies that are protected from takeovers by special rights may nevertheless act as bidders. At global level they can, by preventing mergers, delay the establishment of truly pan-European firms.

Special rights have also a deterrent effect on cross-border investment in the market for portfolio investment. Companies in which there is a risk of discretionary power being exercised by the State do not constitute attractive investment opportunities, thereby depriving these companies of important sources of capital.

In order to improve its understanding of the economic impact of special rights in privatised companies, the Commission has commissioned a study to further examine the microeconomic impact of special rights.15

1.3. The legal framework

1.3.1. Fundamental Treaty principles

Special rights in privatized undertakings may constitute a violation of core principles of the Treaty rules on the free movement of capital and the right of establishment and can only be compatible under EU law under very specific conditions. Measures taken by public authorities must not restrict, directly or indirectly, investments between Member States. Special rights, whether they limit the acquisition of capital or provide for a veto of major strategic decisions on the future of the enterprises, represent a restriction to these freedoms because they are liable to dissuade investors from other Member States from investing in the capital of the privatised enterprises.

The relevant legal basis is provided by Articles 56 to 60 of the EC Treaty. Further guidance is provided by Directive 88/361/EEC16 on the definition of capital movements and by a 1997 Commission Communication “on certain legal aspects concerning intra-EU investment”17. The Communication aimed to indicate to public

15 Study on Restrictions on Investment in EU companies: the Microeconomic Cost. Commissioned to

OXERA under Tender No. ECFIN – E/2004/ 003. Final Report due in November 2005. 16 Directive 88/361/EEC of 24 June 1988 for the implementation of Article 67 of the Treaty , OJ 1988 L

178, p. 5. 17 Communication of the Commission on certain legal aspects concerning intra-EU investment, OJ C 220

of 19.7.1997, p. 15-18.

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authorities how the Commission interpreted the two freedoms at issue, especially in relation to control procedures which some Member States had laid down during the privatisation of state-owned companies. Both portfolio and direct investment, i.e. the acquisition of a quantity of shares which enables the shareholder to participate effectively in the management of the company, constitute capital movements.

Annex 1 provides a detailed analysis of the Treaty based framework and the ECJ case law in the field of capital movements.

1.3.2. Landmark rulings by the European Court of Justice

The most significant development in the field of golden shares has been the rulings that the European Court of Justice delivered in 2002 and 2003 and more recently in June 2005. In a series of seven infringement cases the Court ruled on the scope for special rights under EU legislation. In the cases concerned, the protection methods applied differed from one case to another but many provisions that gave the state special privileges were common:

(1) limiting foreign participation in privatised companies (Portugal);

(2) prior authorisation procedure for investments above certain capital/voting rights thresholds (France, Portugal, Spain, Italy, UK);

(3) the right to veto winding-up, demerger or merger of the undertakings (Spain, Italy, UK);

(4) the right to veto strategic decisions e.g. transfer or use of assets as collateral (France, Spain, UK);

(5) the right to veto decisions concerning the transfer of technical installations for the conveyance of energy products as well as related management decisions provided they are necessary to achieve the Governments objectives concerning the country’s energy supply (Belgium);

(6) power to appoint directors to the company's board of Directors (Belgium, France, Italy);

(7) veto modification of the company's statutes in a way that implies the suppression or modification of the special powers (Italy, UK);

(8) suspension of voting rights above a certain threshold in cases of holdings acquired by public undertakings (Italy).

The Court ruled in favour of the Commission in all cases except in that against Belgium. The Court found that the above national measures, whether they limit the acquisition of capital or veto major strategic decisions on the future of the enterprises, represent a restriction to the free movement of capital because they are liable to dissuade investors from other Member States from investing in the capital of the privatised enterprises. In contrast, in this case against Belgium the Court accepted the compatibility of a right of veto with the Community law. However, this right of veto does not concern decisions relating to the ownership shares or capital of the enterprises as in the cases against Italy, Spain, France, Portugal, etc., but refers

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instead to the use of means and installations with a view to ensuring compliance with the public service obligations incumbent on the companies concerned, namely the safeguarding of energy supplies in the event of a crisis.

The Court rulings confirmed the Commission’s interpretation of the previous ECJ rulings that any national measures that make the exercise of fundamental Treaty freedoms must fulfil the following conditions:

– they must be applied in a non-discriminatory manner;

– they must be justified by imperative requirements in the general interest;

– they must be suitable for securing the attainment of the objective which they pursue; and,

– they must not go beyond what is necessary in order to attain it.

The Court rulings set limits to government control over the privatised undertakings and established principles, which clarify how the exceptions allowed by the Treaty could be implemented in national measures accompanying the privatisation of public undertakings. Furthermore, in the most recent ruling, the Court confirmed that the Treaty provisions on the free moment of capital do not draw a distinction between private undertakings and public undertakings.

In essence, the Court has not ruled out golden shares, but it has set very strict criteria for their use:

• Special powers may not be used to aid economic performance.

• Special powers can only be introduced as a response to overriding requirements of the general interest, they must not be unduly restrictive and must provide legal certainty.

1.3.3. Pending rulings and infringements cases under scrutiny

The Court is currently examining special rights cases that the Commission brought against the Netherlands and Germany. It is expected that they will further refine the interpretation of the Treaty in this area.

In the case of Netherlands, the case concerns the government control in KPN (telecommunications) and TNT (postal services). The special powers in these companies are contained in the Articles of Association, which grant the State the right to nominate 3 out of the 7 to 9 members of the Supervisory Board and a “golden” share in the company, which permits the State to veto major strategic business decisions. These cases derive from the replies to the questionnaire sent out to Member States in 1997.

In the case of Germany, it concerns the Volkswagen law18. This law prevents any shareholder from acquiring more than 20% of the voting rights and confirms a

18 Press release IP/ 04/1209 of 13 October 2004.

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special blocking minority right on any shareholder who has 20% of voting rights. Additionally, the law confers on the federal government and the Land of Lower Saxony a specific right of mandatory representation on the company’s Supervisory Board, irrespective of the number of shares they hold.

Moreover, Italy and Spain have amended the framework privatisation laws that the Court found unlawful following infringement procedures launched in 1988. Both these countries have significantly scaled down the scope of special rights following the Court rulings. The special powers that governments hold include those on the acquisition of holdings and management decisions. Currently the companies concerned in the case of Italy are ENI (energy and petrochemical sectors), ENEL (energy), Finmeccanica (defence) and Telecom Italia (telecommunications) and in the case of Spain Repsol (energy), Telefónica (telecommunications) and Endesa (energy)19. Additionally, in both countries voting rights for public undertakings in energy companies are restricted. The Commission is currently examining the amended laws.

2. FROM THE MAASTRICHT TREATY TO ENLARGEMENT: A DECADE FULL OF DEVELOPMENTS

2.1. The starting point

2.1.1. Identifying special rights in the EU in 1997. The starting point for the EU 15

Following publication of the 1997 Communication, the Commission carried out a survey among Member States that was designed to identify whether existing restrictions to investments in the Community were justified. As with the Commission Communication issued at the same year, it dealt with the two categories of capital movement concerned, “direct” and “portfolio” investment, (a copy of the survey questionnaire is attached in Annex 2). The Commission also resorted to gathering information on an ad hoc basis, as part of its everyday working process, to supplement the information transmitted to it.

The analysis of the information collected by the Commission identified special rights as one of the main restrictions to cross-border capital movements within the EU. Typically, special rights originate in the privatisation laws, which grant the state special rights to retain control of the privatised companies, or in privatisation procedures that stipulate post-privatisation specific commitments. The legislative approach to privatisation varies from one Member State to another. In countries where the scale of the privatisation has been important and its likely impact on the stock market significant, comprehensive framework laws and programmes for the systematic privatisation of state-owned assets were put in place. In contrast, other countries have chosen an ad-hoc approach and adopted company-specific legislation. This is illustrated below.

In the case of Portugal, Italy and Spain, the privatisation programme was based on framework laws and related decree-laws and concerned a number of economic

19 Special rights in Repsol are to be phased out in 2006, in Telefónica in 2007 and in Endesa in 2008.

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sectors. In Portugal20, the government imposed restrictions on ownership in the privatised companies in the banking, insurance, energy and transport sector. At the time of the survey, the government had special rights in Brisa-Auto-estrada de Portugal (transport), Cimport-Cimentos de Portugal (building and materials), Electricidade de Portugal (energy), Petróleos de Portugal (oil), Portucel Industrial (paper) and Portugal Telecom (telecom). In Italy 21, the government introduced by decree special powers in the statutes of three companies: ENI (energy and petrochemical sectors), STET and Telecom Italia (respectively a holding and an operating company in the telecommunications sector; they have now merged). Later on, Italy introduced special rights in the privatisation of ENEL (energy). In the case of Spain22 the authorities introduced special powers in Repsol (energy) and Telefónica (telecom). Soon after the 1997 survey, Argentaria (a bank, now merged with BBV to form BBVA), Tabacalera (a tobacco company, now Altadis), Endesa (energy) were added to the list of privatised companies in which the government retained special rights.

In France, the authorities used an action spécifique, which granted special rights to the French government. The action spécifique23, or special share, sets out the terms of the privatisation of 21 state-owned companies. In practice, the special share has only been used in Société Nationale Elf-Aquitaine (now part of TotalFinaElf). Belgium also used an action spécifique in 1994 when the government decided to sell some subsidiaries of Societé Nationale d’Investissement. By Royal Decrees, it granted the state special rights in three of the company’s subsidiaries operating in the energy sector, Distrigaz, Synatom and Société Nationale de Transport par Canalisations.

Austria maintained special rights (voting caps) in Austria Tabak (tobacco) and VA Tech. (technology). In 1997, the privatisation process in Greece was just beginning. At that time, the state had only partially sold OTE, the national telecom operator, without resorting to any special rights arrangements. Indeed, by law, the government had to retain ownership of at least 75 % of the company’s capital24.

The United Kingdom used the “golden share” arrangements in the privatisation of approximately 20 companies. These included notably British Energy, National Grid Group, National Power, PowerGen, British Gas, Scottish Power, Scottish Hydroelectric, Northern Ireland Electricity, Cable and Wireless, British Airports Authority, Belfast International Airport (now part of the TBI Group), Sealink (now part of Sealink Stena Line), AEA Technology, Rosyth Dockyard, Devonport Dockyard, Nirex, British Aerospace, now BAE Systems (defence), Rolls-Royce (defence). The rights attached to such golden shares were set out in the articles of association of the individual companies and typically gave the government the right to veto certain corporate decisions. Frequently, provisions were inserted in the articles of association limiting participation of other investors.

20 Privatisation Law 11/1990. 21 Privatisation Law No 474/1994. 22 Privatisation Law 5/1995. 23 Law of 6 August 1986, as amended in 1993. 24 Greece has legislated for a mechanism that allows the government to retain a certain degree of control

over privatised companies, but it has not implemented them.

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Ireland held special rights in three major national companies, Irish Life Assurance Company, Greencore Group (sugar and food products)25 and Telecom Eireann (subsequently Eircom).

Company-specific legislation was also used in the Netherlands: the articles of association of KPN (telecom) and TNT (postal services) granted the state special rights concerning strategic management decisions. In Denmark, there were no golden shares but restrictions in the statutes of two partially privatised companies, TeleDanmark (telecom) and Copenhagen Airport. In Sweden, the government retained special powers in one of the privatised companies, Celsius Industrier, an arms manufacturer. The reply from Finland referred to a special share in Gasum Oy, a joint Finish-Russian gas company.

Beyond the special rights cases that are linked to the privatisation programmes of the 1980s and 1990s26, special rights exist in the case of Volkswagen in Germany. Moreover, special rights can be installed by governments in cases of specific concession agreements (e.g. Luxembourg in SES, a global satellite operator).

2.1.2. Pre-accession Screening in 1999. The starting point for the candidate countries

During the pre-accession screening that the Commission carried out in 1999 with the then candidate countries, it became apparent that special rights existed in many companies. The special rights identified originated not only in framework laws or in company-specific legislation, but also in the form of sales agreements of state-owned assets to strategic investors. This type of sale had been the preferred method for special rights in the privatisation in many candidate countries where the need was not only to attract investment, but also to attract strong management expertise and know-how. Typically, such sale agreements included a variety of specific conditions, such as investment target levels or ratios, employment guarantee clauses, environment

25 Greencore was originally the national sugar company; the special share is related to the EC sugar quota

for Ireland. 26 In reply to the 1997 questionnaire Germany indicated the privatisation of Lufthansa, which was carried

out on the basis of the 1997 Aviation Compliance Documenting Act (Luftverkehrsnachweissicherungsgesetz), introduced certain restrictions to ensure that Germany honours bilateral air transport agreements. By virtue of the existing bilateral air transport agreements between Member States and third countries, air carriers need to be majority owned and effectively controlled by nationals of the country where they are established if they wish to operate in third country routes covered by those agreements. In this context, it should be recalled that the Commission took Germany to Court as well as Austria, Belgium, Denmark, Finland, Luxembourg, Sweden and the UK in relation to the conclusion by these Member States of bilateral air transport agreements with the USA, known as “open skies” agreements (Cases C-476/98 Commission v Germany, C-475/98 Commission v Austria, C-471/98 Commission v Belgium, C-467/98 Commission v Denmark, C-469/98 Commission v Finland, C-472/98 Commission v Luxembourg, C-468/98 Commission v Sweden and C-466/98 Commission v UK) Although the Court found the existing agreements between Member States and the USA to infringe Community law, this did not imply that the agreements were null and void. Member States and international organisations, may under the generally accepted rules on the law of treaties not invoke the violation of provisions of internal law as a reason to invalidate an international agreement, unless that violation was manifest and of fundamental importance. Following the ECJ judgements the Member States are subject to the obligation under Article 10 of the Treaty to “take all appropriate measures to ensure fulfilment of the obligations arising out of the Treaty or resulting from action taken by the institutions of the Community”. In so doing, Member States will not be able to enter into obligations in areas where exclusive Community competence has been established.

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protection clauses, etc. The situation with regard to special rights in these countries at the turn of the decade can be summarised as follows:

In the Czech Republic, the privatisation process resulted in the introduction of special shares in about 100 or so companies. The government’s objective was to secure at the initial phase the influence of the state on maintaining certain basic conditions, such as prohibiting the change in the basic activity of the company, restricting the transfer of real property, the dissolution of the company, etc. Typically, the special rights were introduced in the articles of association of the privatised companies. Companies with special rights spanned across all sectors of the economy, namely in pharmaceuticals and medical equipment, cinema, publishing, electricity and gas distribution and water and sewage sectors.

In Poland the authorities retained special rights post- privatisation in about 77 companies, of which 61 were in the sugar industry. The remaining companies were active mostly in the tobacco, pharmaceuticals and car manufacturing industries.

Hungary imposed restrictions on ownership in 31 privatised companies including the National Savings and Commercial Bank (OTP) and others operating in the oil and gas, electricity generation and distribution, telecommunications, food processing industries, defence and pharmaceutical sectors.

In Latvia, special rights were identified in Latvijas Kugnieciba, a shipping company. Similarly, in Lithuania special rights were identified in the case of JSC Geonafta (energy), JSC Lietuvos Telekomas (telecommunications) and JSC Sportine Aviacija, a manufacturer of sailplanes. Later on, Lithuania also introduced special rights in the privatisation of Vakaru Skirstomieji Tinklai, the electricity distribution network company in 2003 27. Lastly, the Estonian authorities had retained special rights in only one company, Eesti Telekom, the national telecommunications company.

At the time of the screening no special rights were identified in privatised companies in Slovakia, Slovenia, Cyprus and Malta.

2.2. 1997-2004 a period of scaling down and abolition of special rights

The period following the adoption of the Commission Communication on intra-EU investment has been full of positive developments from the point of view of abolition or scaling down of special rights in privatised companies. This is the case both for the EU 15 and for the candidate countries preparing for EU membership. Action in that front in some cases came on a voluntary basis while in others it was fostered by the landmark rulings of the Court of Justice.

On the basis of the information collected following the Commission survey in 1997, the Commission opened a dialogue with Member States to discuss the restrictions that had been identified as potentially infringing essential freedoms of the Treaty and, consequently, the completion and efficient functioning of the Internal Market.

27 The privatisation law makes it possible to impose the obligation to preserve jobs, to invest and to

maintain business, which may be limited in time. However, the commitments required in the privatisation included the requirement that the buyer also be the owner (or in control) of a substantial company in Lithuania, or to retain 50% of the shares for an unlimited time.

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In some cases, this dialogue resulted in the voluntary abolition of special rights. For example, Ireland relinquished the special rights in Irish Life Assurance Company and Telecom Eireann. In others, when it considered that they could not be justified by the Treaty exceptions the Commission initiated Treaty infringement proceedings against various Member States. As outlined in the previous section (§1.3.2), the Court has already ruled 28 in a number of cases or such cases are at an advance state of the infringement procedure.

Although in some cases governments redeemed their special rights in privatised companies at the request of the companies to dispel investors uncertainty or at the time of the sale or merger of the companies (e.g. British Telecom and Powergen in the UK; Argentaria and Tabacalera in Spain; Austria Tabak and VA Tech in Austria; TeleDanmark in Denmark; Celsius in Sweden), it was primarily the European Court of Justice (ECJ) rulings that obliged governments to reconsider carefully the future of golden shares. The Court rulings may also have had a deterrent effect in the sense that special rights initially considered in privatisation projects may have been dropped in view of the rulings. This effect is however difficult to measure.

As required by the Court, the Member States concerned have relinquished their special rights or amended the legislation to comply with Court judgement. In the case of France, the government relinquished its special share in Elf Aquitaine29, while Portugal repealed its privatisation framework law, individual decree laws, as well as the law requiring authorisation of acquisitions for holdings of 10% or more in privatised companies. In the case of the United Kingdom, the government redeemed its golden share in the airports operator BAA and the limit on holdings in the company was abolished.

For their part, Italy and Spain amended their respective privatisation framework laws and implementing decrees to narrow down the scope of the original special rights and the manner by which they are exercised 30. Likewise, Italy amended its law restricting voting rights of public companies in gas and electricity enterprises 31 Compatibility of these amended laws with EU law is still under examination by the Commission.

The precedents established by the Court rulings enabled the Commission to convince Member States and to obtain the abolition of special rights in other instances. In Denmark, ownership limits in Copenhagen Airport A/S were abolished32 . In May 2004 the British government , on the basis of the BAA ruling, redeemed its golden shares in National Grid (now National Grid Transco), Viridian Group plc (of which Northern Ireland Electricity is now a subsidiary), Scottish Power and Scottish Hydroelectric (now a subsidiary of Scottish and Southern Energy). It also announced its intention of abolishing its golden share in Phoenix Natural Gas. Similarly, the UK

28 See section 1.3.2 above for the detailed analysis of the Court’s rulings. The cases mentioned were

against Italy (Case C-58/99), Portugal (Case C-367/98), France (Case C-483/99), Belgium (Case C-503/99), Spain (Case C-463/00), the United Kingdom, (Case C- 98/01) and Italy (Case C-174/04).

29 Decree No 2002-1231 of 3 October 2002. 30 Legge Finanziaria 2004 (Art 4 § 227-231) in Italy. The 25th Additional Provision of Law No 62/2003

in Spain. 31 Decree-Law No 81 of 14 May 2005. 32 A sectoral law shall also limit the authorities’ veto rights in the airport company.

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government announced the intention of reducing the scope of the special share in British Energy to cater only for national security considerations. Special shares in Cable and Wireless, British Gas (now BG Group plc), National Power (now International power) and AEA Technology plc had already been redeemed at an earlier stage (between 1999 and 2002). The latest information available (in the absence of a UK reply to the latest questionnaire) shows that the UK government still keeps a golden share in BAE Systems, Rolls Royce and Devonport Dockyard. However, the rights attached to the special share in BAE Systems and Rolls Royce have been scaled down in 2002. It also shows that Nirex, a company active in the nuclear sector, was repurchased by the UK government in 2005 and is now 100% State-owned.

Regular contact between the Commission and the authorities of the then candidate countries during accession negotiations were instrumental in raising awareness on the issue of special rights among the respective governments. Over the period 1999-2004 candidate countries relinquished or reduced the scope of the special rights they had created during the transformation and privatisation of their economies in the 1990s.

In the Czech Republic, the process of abolishing the 100 or so special rights reported during the pre-accession screening (or of replacing them with general rules governing business relations) eliminated all but 37 cases. Furthermore, the Czech Republic has set a deadline for phasing out most of the remaining special rights.

As a result of accession negotiations, Hungary undertook to align its legislation on special rights in privatised companies by modifying its privatisation law and to conduct a case-by-case examination of existing special rights by the date of accession. The amendments to the law, introduced in Parliament in March 200433, aim to abolish special rights in 8 companies, including the National Savings and Commercial Bank (OTP) and companies in food processing, pharmaceuticals, manufacturing and the services sectors. They also aim to reduce the scope of special rights in the remaining 23 privatised companies and to introduce specific/restrictive criteria for exercising these rights.

Estonia relinquished the special rights in Eesti Telekom upon accession in May 2004. Lithuania abolished special rights in JSC Geonafta, JSC Lietuvos Telekomas and JSC Sportine Aviacija, but retained the special rights in the electricity company Vakaru Skirstomieji Tinklai.

Poland phased out some of the special rights identified during the screening process. However, at the same time, it continued imposing specific conditions on the new owners of the privatized companies. As a result, the net effect is that Poland reduced the special rights held in companies from 77 at the time of the screening to 73 at the time of the survey. However, later on Poland confirmed that during 2004/beginning 2005 special powers had been cancelled in 24 of these companies with the number of companies now being 49 in which the government retains special powers.

33 Bill T/9102.

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3. THE STATE OF PLAY ONE YEAR FOLLOWING ENLARGEMENT

Since the coming into force of the Maastricht Treaty in 1994, the EU has come a long way in raising the awareness and reducing the obstacles to intra-EU cross-border capital movements, particularly in respect of special rights. In view of the developments over the last few years, both in terms of the European Court of Justice rulings and in the regulatory framework for the protection of services of general interest, the Commission decided in April 2004 to carry out a new survey. The objective was to gain a better understanding of the current situation and evaluate how the EU special rights landscape has changed since the previous survey in 1997 and, in particular, following enlargement.

The Commission has identified special rights in 141 companies, which cover significant sectors of the economy from enterprises providing public services in telecommunications, electricity, gas, energy, postal services to banking and insurance. As explained in the next sections, this large number includes in some cases regional companies (notably 29 regional waterworks in the Czech Republic and 21 energy companies in Hungary) while in others, the scope of the companies is national. Any cross-country comparison in terms of number of cases of special rights should therefore take these differences into consideration. The full list of companies concerned –without prejudice to their compatibility with EU law- is given in Annex 334.

With regard to the EU 15 the 2004 survey has not revealed any surprises. As outlined in Part 2 a large number of special rights have been or are the process of being abolished or scaled down. Furthermore, a number of cases are pending in front of the European Court of Justice or being examined by the Commission in the framework of infringement proceedings.

Special rights are still widely present in the former transition economies for reasons linked to the timing and scale of the privatisation process in these countries. However, as indicated in the previous section, in most cases the Member States concerned have put in place a process to deal with this issue. In a large number of cases, there is already a deadline given or a proposal for the phasing out of the special rights has been announced. In other cases special rights can be justified by exceptions provided for in the Treaty or are structured in a way that is compatible with EU law. A dynamic assessment would therefore seem to point to a diminishing role of special rights as an instrument of government intervention in the management of privatised companies. The Commission intends to request additional information and analyse further specific cases where it considers that there may be an infringement of EU law. Where necessary, the Commission will proceed with infringement procedures in due time.

34 This section is based essentially on the survey of intra-EU investment conducted by the Commission in

2004 to update the 1997 survey and screening results. The survey was based on the same questionnaire as in 1997. Most Member States provided fairly detailed replies and described the relevant legislation fairly well. In one instance (Slovakia) the Commission has requested supplementary information. Further clarifications will be needed from Latvia and Lithuania. Replies from Malta and the UK have not been received as yet. The reply from Belgium has not been included in the analysis due to its late arrival (30.06.2005). As seen in §2.2, in the case of the UK, the latest information available shows that it keeps a golden share in 4 companies.

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3.1. A wide range of economic sectors of the EU economy still concerned

Special rights are present today in privatised companies in a variety of industries, in old and new Member States alike. In some cases these companies play a significant role in the economy of the country concerned and as a group in the EU economy at large. In terms of number of companies, the state retains special rights in privatised companies which could be classified in three categories: “Providers of services of general economic interest” industries account for 50% of cases and “competitive” industries represent about 37% of companies, while the rest of companies are classified under “miscellaneous” and include companies active in defence, in the nuclear field and other areas that could be justified by the Treaty exceptions.

Providers of services of general economic interest

Sectors that traditionally fall under this heading account for half of the companies where special rights are currently identified. This high number is due to the fragmented nature of the industry. Thus, in some Member States the utility companies concerned are regional rather than national.

Regulated industries encompass industries that are network industries and/or need to be regulated on public interest grounds, for example, in order to guarantee the supply of the service concerned, security, or effective competition. In most cases, companies operating in these industries are former public utilities, active in electricity and gas distribution, telecommunications, water treatment and distribution, postal services, etc. Transport and oil are also among the sectors that have been traditionally regulated. This category has the broadest coverage, in terms of countries concerned. At least 10 Member States have special rights in companies in these sectors. They concern old Member States and new Members States alike 35, but in some cases, they are time-limited.

In the case of the Czech Republic, the State has special rights in a cluster of 29 regional waterworks and sewage utility companies. However, these are to be phased out in 2010 36. Likewise, special rights in Cesky Telecom -privatised in April 2005- will be abolished in 2008.

As far as Hungary is concerned, if the new privatisation framework law is approved by Parliament in its current form, the government would retain special rights in a cluster of 21 companies active in the energy sector (oil, gas and electricity) and in Magyar Telekom, the telecom operator.

In Poland the government has retained special rights in three companies in the electricity sector (Elektrownia Rybnik S.A., Stoen S.A. and Towarowa Gielda Energii S.A.). In addition, it has maintained special rights in PKN Orlen, a company active in the fuel industry. In the case of Stoen S.A. and of PKN Orlen, however, the special rights in question should expire in 2006 and mid-2005, respectively.

35 These countries include Austria, the Czech Republic, Finland, Hungary, Italy, Latvia, Lithuania, the

Netherlands, Poland, and Spain. 36 Government Resolution No 119/2001.

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The remaining companies in this category in which restrictions exists are the Austrian electricity company Österreichische Elektrizitätswirtschafts AG (known as Verbund)37, the Finnish gas company Gasum Oy, three Italian companies (ENI, ENEL and Telecom Italia), two Latvian companies SIA Lattelekom (telecommunications) and Latvijas Gaze (energy) 38, the Lithuanian electricity company AB Vakaru Skirstomieji Tinklai, two Dutch companies (TNT and KPN), three Spanish companies (Telefónica, Repsol, Endesa) the satellite operator SES (Luxembourg) and one energy company in the UK (British energy).

Competitive industries

This category accounts for approximately 38% of special rights cases currently identified EU wide. It encompasses the following sectors: banking, forestry and live animals, the sugar industry, food products, beverages and tobacco, textiles, pharmaceuticals and medical equipment, metals, metal products and machinery, construction and building materials and other goods and services.

Three new Member States: Poland, the Czech Republic, and Hungary are particularly concerned. Due to the significant changes that the economies of these countries have undergone in a short period of time, it should come as no surprise that they represent a sizeable portion of the special rights cases in this sector. Often they are the result of the state imposing conditions or “buyer agreements” on the new owners at the time of the privatisation. These commitments are however often time-limited.

Poland accounts for the bulk of the companies in the competitive sector, with 40 firms having special rights. They include a bank, 8 sugar companies, 15 companies in food products, catering, alcohol production and tobacco, but also firms e.g. in timber, textiles, pharmaceuticals, construction and building, metals and machinery. For 12 of these companies, specific deadlines to abolish the special rights between 2005 and 2008 have been given and, for 12 other companies, measures are announced without giving a specific deadline. By abolishing special rights in 16 similar cases over the past year, Poland has proven its willingness to take action on the back of such announcements. For 16 companies, special rights persist and no deadline for their abolition has been given.

In Hungary, as seen in part 2 of this report, special rights in the 8 companies operating in competitive industries are expected to be abolished by amending the privatisation law.

In the Czech Republic, special rights in Hřebčín Napajedla, a stud-farm company, are to be relinquished in 2005. However, the government has not given any indication as to the time-limits for special rights in Jan Becher-Karlovarská Becherovka, a traditional drink production company (11 % state-owned). The economic importance of these companies is fairly modest.

Miscellaneous

37 A company in which the State owns by law at least 51% of the company but restricts the voting rights

of any other shareholder to 5% of the capital. 38 It is not clear from the replies to the questionnaire what is the situation regarding special rights in SIA

Lattelekom and in Letvijas Gaze.

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The remaining 18 companies where special rights have been identified belong to the defence and nuclear sector, and in other miscellaneous sectors which are generally covered by the Treaty exceptions. Thus, France has introduced special rights in two partially privatised companies: Aerospatiale-Matra-EADS and Thales (ex-Thompson CSF), which operate in the defence industry.39 Italy has special rights in the defence company Finmeccanica. Hungary has retained special powers in Danube Aircrafts, a company operating also in the defence sector40. Likewise, the UK retains a golden share in BAE Systems (defence), Rolls Royce (defence) and Devonport Dockyard. In the Czech Republic special rights in three research companies (Geofyzika Brno a.s., Plzeňský Prazdroj a.s. and Ustav nerostnych surovin a.s) should have been phased out in 2004. However, the Czech government retains special rights in Ústav jaderného výzkumu Řež, a company active in the nuclear field, and in České přístavy, the Czech ports company. Similarly, Latvia retains special powers in Latvijas Kugnieciba, a company operating in the shipping sector41. Finally, Poland retains five cases of special rights in the management of special economic zones.

3.2. The companies involved are important economic actors at national and EU level

This section attempts to give an approximate measure of the size and economic relevance of the companies that have been identified as having special rights, using three indicators: market capitalisation, turnover and market share. Naturally, there is no single common denominator for comparing companies across the board and indicators such as market capitalisation, turnover or market share are necessarily imperfect as they can only cast light on one aspect of a company’s importance42. Due to the limited amount of comparative information the sample presented here should not be viewed as reflecting a deliberate choice of presentation, but rather as a result of the paucity of data publicly available. Nevertheless it is clear from the analysis below that more often than not companies with special rights reserved for the government are important economic actors in the country concerned and, taken together as a group, are of considerable importance for the EU economy as a whole.

39 The French State has a special share in Thales. In the case of EADS, the restriction concerns a special

agreement for the State to buy back activities related to ballistic missiles. 40 Special rights in Danubian Aircrafts are to be scaled down with the adoption of the amendments to the

Privatisation law (Bill T/9102). 41 Special rights retained in Latvijas Kugnieciba will be partly phased out in 2005 while conditions remain

on maintenance of the business activity and on renovation of the fleet. 42 For example, market capitalisation is only available for listed companies, while market share can only

provide information related to a company’s sector or industry. Furthermore, publicly-available information was extremely scarce for the majority of companies surveyed. As a consequence, the figures that are presented below concern a handful of companies among those that have been identified and should be seen as having mainly an illustrative value. This information was gathered by the Commission using publicly available information, either from the regulator, the national stock exchange, or from companies’ annual reports and websites.

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Table 1. Market capitalisation of privatized companies in which the State retains special rights

(figures are for the end of 2004)

Listed companies Stock exchange of reference

Market capitalisation

(€ million)

Share of total market capitalisation (%)

Cesky Telecom Czech Republic 3,913.4 18.02 Aerospatiale-Matra-EADS France 17,319.1 1.51

Thales France 6,070.4 0.53 Volkswagen Germany 10,681.6 1.22

OTP Hungary 6,341.6 29.70 MOL Hungary 5,613.5 26.30

Magyar Telekom Hungary 3,667.8 17.20 ENI Italy 73,761.5 12.70

ENEL Italy 44,276.4 7.62 Telecom Italia Italy 33,766.2 5.81 Latvijas Gaze Latvia 368.9 34.53

Latvijas Kugnieciba Latvia 133.7 12.51 AB Vakaru Skirstomieji Tinklai Lithuania 258.7 5.44

KPN Netherlands 16,282.5 4.11 TNT Netherlands 9,595.6 2.42

PKN Orlen Poland 7,891.2 15.21 Telefónica* Spain 108,789.6 16.2

Repsol Spain 23,391.7 3.38 Endesa Spain 18,305.8 2.65

* Includes Telefónica Móviles

The above table presents the absolute measure of companies’ market capitalization, as well as the share of companies in their national stock exchange, as a percentage of total market capitalisation.43 At the end of 2004, the five biggest companies, in terms of market capitalisation, in which the State retained special rights were Telefónica, ENI, ENEL, Telecom Italia and Repsol.

In countries where the stock market is relatively small, companies accounted for a significant portion of total market capitalisation. In Latvia, Latvijas Gaze and Latvijas Kugnieciba represented 34.5% and 12.5% of the Latvian market, respectively. In Hungary, OTP, MOL and Magyar Telecom, the three largest companies on the Budapest stock exchange, totalled more than 73% of total market capitalisation with, respectively, 29.7%, 26.3% and 17.2% of total market capitalisation. Cesky Telecom accounted for 18% of the Prague stock exchange and PKN Orlen accounted for 15,2% of total market capitalisation on the Warsaw stock exchange. Conversely, in larger stock markets, the share of companies in their national stock market is perhaps not a very telling indicator. For example, Repsol and Endesa represent only 3.4% and 2.7% of the total market capitalisation on the Madrid market. However, Repsol and Endesa are respectively the fifth and sixth largest companies to be quoted on the Madrid stock exchange, in terms of market capitalisation.44

43 When companies were listed on several markets at once, as is often the case, reference is made to the

main national market only. 44 Bolsas y Mercados Expañoles, 30.11.2004.

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Table 2. Turnover of privatized companies in which the State retains special rights

(figures are for the end of 2004)

Company Country Turnover (€ million)

As a percentage of GDP

Cesky Telecom Czech Republic 2,046.7 2.4% Gasum Oy45 Finland 653.0 0.4%

Aerospatiale-Matra-EADS France 31,761.0 2.0% Thales France 10,288.0 0.6%

Volkswagen Germany 88,963.0 4.1% Magyar Telekom Hungary 2,389.7 3.0%

ENI Italy 58,346.0 4.3% ENEL Italy 36,500.0 2.7%

Telecom Italia Italy 31,237.0 2.3% TNT Netherlands 12,635.0 2.7% KPN Netherlands 12,102.0 2.6%

PKN Orlen Poland 7,488.8 3.8% Repsol Spain 41,689.0 5.2%

Telefónica Spain 30,322.0 3.8% Endesa Spain 17,642.0 2.2%

Another measure of the economic importance of the companies in question is their annual turnover. The table above shows the companies’ turnover in 2004, and how much it represents relatively to their country’s gross domestic product (GDP). With few exceptions, companies’ share of the national GDP is roughly comprised in a 2%-5% bracket. The first four biggest companies in relative terms were Repsol (5.2%), (not a privatised company) ENI (4.3%) and Volkswagen (4.1%).

Finally, market share is yet another indicator of the weight of a company in its sector. This is especially relevant with respect to former public utilities, which are usually the main incumbent in the market. In the postal sector, for example, TNT is the historical operator and the main company in the Netherlands. In 2003, the Dutch postal regulator stated that “TPG Post [TNT’s former name and now the name of its mail brand] holds a market share of virtually 100% on the consumer market. On the business market, TPG Post holds a market share in all segments of at least 90%.”46

In the energy sector, Austria has special rights in Verbund the former State monopoly (Austria’s leading electricity company in the free market generates almost half of Austria’s demand and transports 80% of the high-voltage power within the country) and Finland has a special share in Gasum Oy the sole provider of natural gas.47 The Italian State has special rights in ENI and ENEL, both former State monopolies. With a 36.6% share in the retail market, ENI is the leader in Italy in the gas sector.48 In 2003, ENEL generated 49.3 % of electricity in Italy, well ahead of the second market participant, Edison (9%).49 In the telecommunications sector, governments hold special rights in former State-owned monopolies, including the

45 2003 turnover. 46 OPTA, Annual report, 2003. 47 Verbund and Gasum websites, April 2005. 48 ENI, April 20, 2004. 49 Autorità per l’energia e il gas.

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Czech Republic (Cesky Telecom), Hungary (Magyar Telekom), Italy (Telecom Italia), Latvia (Lattelekom), the Netherlands (KPN) and Spain (Telefónica).

In some cases, companies that are part of a group of regional companies can in fact be understood as forming a single cluster, which commands a sizeable portion of the national economy. Such is the case in the Czech Republic where 29 regional water distribution companies have special rights, and in Hungary, with special rights in 21 companies that are part of the national power grid, in the electricity, oil and gas supply network.

In more fragmented markets, companies that display special rights are nevertheless market leaders in their sector. For example, PKN Orlen holds a leading position in the Polish retail and wholesale markets for petroleum and petrochemical products. PKN Orlen’s share in the wholesale market for gasoline and diesel oil amounts to 67% and 60%, respectively, and it controls 40% of the retail market.50 In Latvia, Latvijas Gāze is the most important energy supply company with a 31.5 % share of the energy consumption market for natural gas. In Spain, Endesa was the first market participant in 2004 with 36.6% of the liberalised customer market for electricity, 44.5% of the regulated market and 43% of the electricity wholesale market. Endesa also had a 10 % share of the Spanish natural gas market.51

Conclusion

The picture that comes across one year after enlargement is that special rights in privatised companies are being phased out. Most Member States are in the process of abolishing the special shares identified in the survey. In a number of cases, there is already a deadline for their abolition or a proposal for their phasing out has been announced. This is due to the pro-active approach taken by the Commission in engaging in a dialogue with Member States governments and to the impact of rulings that the European Court of Justice delivered in 2002, 2003 and 2005. Moreover, in the last few years a relatively robust regulatory environment has been developed in specific sectors both at EU and national level, which allows Member States to protect the services of general interest in a relatively less restrictive manner It should however be recalled that in certain cases special rights could be justified due to exceptions provided for in the Treaty.

50 PKN Orlen, Annual Report, 2003. 51 Endesa, website, April 2005.

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Annex 1

Special rights: legal considerations

Special rights in undertakings may constitute a violation of core principles of the Treaty and can only be tolerated under very specific conditions. The relevant legal basis on the matter includes Articles 56 to 60 of the EC Treaty for which further guidance is provided by Directive 88/361/EEC52 on the definition of capital movements and by a 1997 Communication53 as well as a recent series of landmark rulings by the European Court of Justice.

The rulings of the European Court of Justice

The first ruling was delivered on 23 May 2000 in the case against Italy (Case C-58/99) regarding the framework privatisation Law No 474/1994 and related decrees concerning the government control in ENI (energy sector), STET and Telecom Italia (respectively a holding and an operating company in the telecommunications sector; they have now merged). On 4 June 2002, the Court ruled on the cases brought against Portugal, France and Belgium. In the case of Portugal (Case C-367/98), the provisions at issue were the framework laws and regulations concerning the privatisation of undertakings in the banking, insurance, energy and transport sectors. In the case of France (Case C-483/99), it concerned a Decree of 1993 vesting in the state an action spécifique in Société Nationale Elf-Aquitaine (now part of Total Fina Elf), which supplies France with petroleum products. The case against Belgium (Case C-503/99) concerned two Royal Decrees dating from 1994 which vested in the state golden shares in Distrigaz and Société Général de Transport par Canalisations. On 23 May 2003 the Court ruled on the cases brought against Spain and the United Kingdom. The case of Spain (Case C-463/00) concerned the provisions of the privatisation Law 5/1995 and Royal Decrees, which gave government control in Repsol and Endesa (energy), Telefónica (telecommunications), Argentaria (banking; now merged with BBV to form BBVA) and Tabacalera (tobacco; now Altadis). In the case of the United Kingdom, (Case C-98/01) the provision at issue pertained to the Articles of Association of Britain’s biggest airport operator, British Airport Authorities (BAA), which owns e.g. Heathrow, Gatwick and Stansted. Recently, on 2 June 2005, the Court ruled on a case brought against Italy (Case C-174/04) concerning the suspension of voting rights attached to shareholdings exceeding 2% to public undertakings investing in gas and electricity companies.

The freedom of capital movements: a fundamental Treaty principle

Following full liberalisation54 of capital movements by Directive 88/361/EEC, the freedom of capital movements gained the same status as the other Internal Market freedoms in 1994, with the entry into force of the Maastricht Treaty. Article 56 prohibits all restrictions on the free movement of capital and payments between Member States and between Member States and third countries.

52 Directive 88/361/EEC of 24 June 1988 for the implementation of Article 67 of the Treaty , OJ 1988 L

178, p. 5. 53 Communication of the Commission on certain legal aspects concerning intra-EU investment, OJ C 220

of 19.7.1997, p. 15-18. 54 Article 67 of the Treaty of Rome in its original version already required the progressive abolition of all

restrictions on the movement of capital, but only to the extent necessary to ensure the proper functioning of the common market.

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Although the Treaty does not define the term “movements of capital”, it is settled case-law of the European Court of Justice55 that Directive 88/361/EEC and the nomenclature annexed to it can be used to define the term capital movement. Transactions representing capital movements are listed in Annex 1 of the Directive.

Direct investment56, in addition to being a form of capital movement, is also covered by the right of establishment. Article 43 of the EC Treaty prohibits restrictions on the freedom of establishment of nationals and companies of a Member State in the territory of another Member State. Hence, with respect to the acquisition of controlling stakes in a domestic company by EU investors, the parallel application of both freedoms occurs57. In recent rulings on special rights the European Court of Justice has pointed out that restrictions on freedom of establishment are inextricably linked to the free movement of capital58.

Furthermore, in 1997 the Commission published a Communication on certain legal aspects concerning intra-EU investment59 that deals with cross-border investment in the European Union. This type of investment had increased significantly since the creation of the Internal Market and some Member States had started introducing measures in order to monitor, and in some cases control, this development. It was important for the Commission, in its institutional role, to ensure that some of these measures did not constitute obstacles to investments coming from other Member States. To this end the Commission sought to provide guidance on the interpretation of the applicable Treaty freedoms based on the jurisprudence of the European Court of Justice.

A narrow scope for exceptions

As is the case for the other fundamental freedoms, the Treaty allows for certain exceptions to the freedom of capital movements60. These exceptions, however, have to be understood in a narrow sense.

55 See e.g. judgments in Commission v Portugal, case C-367/98, paragraph 37, Commission v France,

case C-483/99, paragraph 36 and Commission v Belgium, case C-503/99, paragraph 37. 56 Direct investment is characterised, in particular, by the possibility of participating effectively in the

management of a company or in its control. Conversely, “portfolio investment” represents investment without the aim of exerting any influence on the management of the company.

57 In fact, two Treaty provisions deal with the relationship between capital movement and establishment. Article 58(2) of the EC Treaty states “the provisions of this Chapter shall be without prejudice to the applicability of restrictions on the right of establishment which are compatible with this Treaty”. At the same time, Article 43(2) states that the freedom of establishment includes the right to “set up and manage undertakings”, this right being “subject to the provisions of the Chapter relating to capital”. There may be exceptions to the parallel approach of the freedom of capital movements and the freedom of establishment, notably in relation to third countries since of the two only the freedom of capital movements applies to third countries and Member States alike.

58 For example, in case C-463/00, Commission v Spain. 59 Communication of the Commission on certain legal aspects concerning intra-EU investment (97/C

220/06) OJ No C 220 of 19.7.1997. 60 Member States may take measures which are justified by public policy or public security (Article 58),

public health (Article 46) and defence (Article 296). Other exception to the freedom of capital movements concern third countries (Article 57), measures in the field of taxation and prudential supervision of financial institutions (Article 58), safeguard measures in the case that capital movements were to cause, or threaten to cause, serious difficulties in the operation of the European Monetary Union (EMU, Article 59) and the imposition of financial sanctions on third countries (Article 60). Finally, some exceptions concern the acquisition of real estate (a protocol which allows Denmark to maintain existing legislation on the acquisition of second homes, a special protocol on the Åland Islands in Finland, and a special derogation for Malta on the acquisition of secondary residences).

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Discriminatory measures, i.e. those applied to investors from another Member State, are considered incompatible with the free movement of capital and the right of establishment unless covered by one of the exception stipulated in the Treaty.

As regards non-discriminatory measures, i.e. those applied to nationals and other EU investors alike, they are permitted in so far as they are based on a set of objective and stable criteria which have been made public and can be justified on imperative requirements in the general interest. In any case, the measures must not go beyond what is necessary in order to achieve their objective: they must be compatible with the principle of proportionality (see last section below).

What represents a restriction to Treaty freedoms?

Special rights affect the position of any potential shareholder as such, consequently affect market access and are liable to deter potential direct investment: they restrict the Treaty freedoms of capital movement and establishment61. Governments cannot claim that rules concerning the functioning of the privatised enterprise result merely from the application of normal company law mechanisms, if Member States act in their capacity as a public authority when establishing them62. The implication is that from the moment the State introduces such rules, both Treaty freedoms apply and respective restrictions need to be justified. Recently, the Court has clarified that the Treaty provisions on the free movement of capital do not draw a distinction between private undertakings and public undertakings63.

With respect to their position as shareholder in a privatised undertaking, Article 295 EC does not have the effect of exempting the Member States’ system of property ownership from the rules on the freedom of capital movements or other fundamental rules of the Treaty64. The Commission has clarified that when a Member State is privatising a company, and when that Member State acts in its capacity as a controlling shareholder, it may apply certain conditions concerning the sale as long as such conditions are based on specific economic policy objective clearly defined beforehand; are applied without discrimination; are limited to the time necessary to achieve the specific objectives; and, leave no margin for interpretation by the authorities (IP/01/872 of 20 June 2001). However, once a company is privatised, the authorities must desist from further intervening.

As regards the temporary nature of some special rights, it needs to be stressed that an infringement of Treaty obligations does not cease to be an infringement merely because it is limited in time65.

Possible justifications for such restrictions

The European Court of Justice confirmed that the free movement of capital may be restricted only by national rules which are justified by reasons referred to in the Treaty or, if non-discriminatory, by overriding requirements of the general interest66.

61 See Commission v UK, case C-98/01, paragraph 47. 62 Commission v UK, case C-98/01, paragraphs 48 and 49. 63 Commission v Italy, case C-174/04, paragraph 32. 64 Commission v France, case C-483/99, paragraph 44, Commission v Belgium, case C-503/99, paragraph

44, and Commission v Spain, case C-463/00, paragraph 67. 65 Commission v Spain, case C-463/00, paragraph 81.

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In fields involving the provision of services in the public interest67 or strategic services, it is undeniable that certain concerns may justify the retention by Member States of a degree of influence within privatised undertakings68. The safeguarding of energy supplies and the provisions of telecommunications or electricity services in the event of a crisis may constitute a public security reason and may therefore justify an obstacle to the free movement of capital69. However, as an exception to this fundamental principle, the notion of public security must be interpreted strictly. Thus, public security may be relied on only if there is a genuine and sufficiently serious threat to a fundamental interest of society.

Purely economic reasons, on the other hand, can never serve as a justification for imposing restrictions70. Considerations identified by the ECJ as such purely economic reasons include e.g. choosing a strategic partner, strengthening the competitive structure of the market concerned or modernising and increasing the efficiency of the means of production71.

The principle of proportionality and legal certainty

As regards non-discriminatory measures, i.e. those applied to nationals and other EU investors alike, they are permitted in so far as (1) they are based on a set of objective and stable criteria (2) which have been made public and (3) can be justified on imperative requirements in the general interest. (4) In any case, the measures must not go beyond what is necessary in order to achieve their objective: they must be compatible with the principle of proportionality. In order to be proportionate, restrictive measures, in particular systems of prior administrative approval, must be suitable for securing the objective they pursue and they must no go beyond what is necessary in order to attain it, meaning that the same objective could not be attained by less restrictive measures72. They must also be based on objective and stable criteria which are known in advance and subject to judicial review73. Prior authorisation procedures as well as the right to veto without any precise and objective criteria assign a potentially discriminatory power to national authorities which could be used arbitrarily74.

By ruling in favour of Belgium in the case of Distrigaz75, where the government held ex post veto rights to maintain minimum supplies of gas in the event of a real and serious threat, the European Court of Justice has provided guidance on what could represent a proportionate justification for restricting the free movement of capital by means of special rights. The Court

66 Commission v Spain, case C-463/00, paragraph 68, Commission v Portugal, case C-367/98, paragraph

49, Commission v France, case C-483/99, paragraph 45 and Commission v Belgium, case C-503/99, paragraph 45.

67 In Commission v Spain, case C-463/00, paragraph 70, the European Court of Justice has ruled that a tobacco company and a commercial bank do not qualify as providers of services in the public interest in this sense.

68 Commission v Portugal, case C-367/98, paragraph 47. 69 Commission v France, case C-483/99, paragraph 47, Commission v Belgium, case C-503/99, paragraph

46, and Commission v Spain, case C-463/00, paragraph 71. 70 See e.g. Commission v Portugal, case C-367/98, paragraph 52. 71 Commission v Portugal, case C-367/98, paragraph 52. 72 Commission v Italy, case C-58/99, paragraph 13, Commission v Portugal, case C-367/98, paragraph 49,

Commission v France, case C-483/99, paragraph 45, Commission v Belgium, case C-503/99, paragraph 45, and Commission v Spain, case C-463/00, paragraph 68.

73 Commission v Spain, case C-463/00, paragraph 69, Commission v France, case C-483/99, paragraph 46 and Commission v Portugal, case C-367/98, paragraph 50.

74 Commission v France, case C-483/99, paragraphs 50 and 51. 75 Commission v Belgium, case C-503/99.

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established a dividing line on what can be considered proportionate by highlighting the following features of that specific case:

• the system aims at the protection of a legitimate general interest, namely to maintain minimum supplies of gas in the event of a real and serious threat;

• the system is one of ex post opposition, which is less restrictive than a system of prior approval;

• there are strict time limits in place for the exercise of those opposition powers;

• the strategic assets concerned and the management decisions which could be challenged are specifically listed, and

• the system’s objective and stable criteria are subject to an effective review by the courts.

One technical argument accepted by the European Court of Justice concerned the Community Directive 98/30/EC on common rules for the internal market in natural gas which provides a Community framework for the exercise by Member States of powers in respect of the public service obligations imposed on undertakings in the sector and which might have protected the public interest involved. The Court ruled that this Directive could not affect the ruling since the time-limit for its transposition (10 August 2000) expired eight months after the case was lodged with the Court (22 December 1999).

Summary

Based on the fundamental Treaty freedoms regarding direct investment, namely Article 56 on the free movement of capital and Article 43 on the right of establishment, and the respective case law outlined above, special rights are not ruled out, but strict conditions apply for their use:

– Special rights may not be justified on the grounds that they support economic performance.

– Special rights can solely be introduced as a response to overriding requirements of the general interest; they must not be unduly restrictive and must provide legal certainty.

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Annex 2 QUESTIONNAIRE ON INTRA-EU INVESTMENT

1. DEFINITIONS

Please provide details of definitions of the concepts of ‘foreign direct investment’, ‘portfolio investment’, and ‘national interest’ as officially used in your country. Is there a specific source of such definitions?

2. GENERAL LEGISLATIVE FRAMEWORK

Please list and supply copies of any general legislation or other regulations governing:

• Foreign (direct and portfolio) investment in your country, • The partial or full disposal of assets of direct or indirect holdings of the State or

other public bodies in domestic undertakings (e.g. privatisation).

3. SECTOR-SPECIFIC LEGISLATION

Have specific sectoral regimes been established to regulate ownership in certain economic sectors, in particular sectors where the dominant provider had previously been in the State sector? If so, please describe briefly the regimes and supply the relative legislation.

4. UNDERTAKING-SPECIFIC LEGISLATION

Have specific regimes been established to regulate ownership in certain undertakings, in particular undertakings where the dominant provider had previously been in the State sector? If so, please describe briefly the regimes and supply the relative legislation.

5. SPECIAL CONTROL POWERS

Please supply a list of all economic sectors and specific undertakings in your country where the State, either directly or indirectly, has introduced any ‘special control powers’ (i.e. by means of general legislation, sector-specific legislation, undertaking-specific legislation, articles of association, golden shares, bilateral agreements between the State and the company involved, etc.) on the ownership and/or certain decisions normally taken by management bodies of these undertakings.

For each of these items, please provide the following information:

• A copy of the specific legal texts (e.g. laws, decrees, regulations, the relevant articles of association, etc.) which establish and regulate these powers for the company concerned.

• A brief and schematic description of these special control powers. • Where these ‘special control powers’ are applicable through an authorisation

procedure or a veto procedure, the specific criteria according to which the State exercise its powers.

• The justification for the establishment of such ‘special control powers’ by the State.

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6. DISPOSAL OF PUBLICLY-OWNED ASSETS

Please supply the list of the major disposals of publicly-owned assets fully or partially completed in your country, as well as the following information:

• Name of the undertakings, • Sector of activity, • Date of disposal, • Percentage of capital sold and retained by the State, • Scheduled further disposals of assets in such undertakings.

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Annex 3

List of companies in which the State retained special rights76

Country Company Industry Expiry date

State ownership (%)

1. Austria Österreichische Elektrizitätswirtshaft AG electricity none 51

2. Czech Republic Cesky Telecom telecom 2008 0

3. Jan Becher – Karlovárská Becherovka a.s. beverages none > 10

4. CHEVAK Cheb, a.s. water 2010 < 10

5. Chodské vodárny a kanalizace a.s. water 2010 < 10

6. Severočeská vodárenská společnost a.s. water 2010 < 10

7. Slovácké vodárny a kanalizace, a.s. water 2010 < 10

8. VaK Bruntál a.s. water 2010 < 10

9. Vodárenská a kanalizační a.s. water 2010 < 10

10. Vodárny Kladno-Mělník, a.s. water 2010 < 10

11. Vodohospodářská a obchodní společnost, a.s. water 2010 < 10

12. Vodohospodářská společnost Olomouc, a.s. water 2010 < 10

13. Vodohospodářská společnost Vrchlice - Maleč, a.s. water 2010 < 10

14. Vodohospářská zařízení Šumperk,a.s. water 2010 < 10

15. Vodovody a kanalizace Beroun, a.s. water 2010 < 10

16. Vodovody a kanalizace Břeclav, a.s. water 2010 < 10

17. Vodovody a kanalizace Chrudim, a.s. water 2010 < 10

18. Vodovody a kanalizace Havlíčkův Brod, a.s. water 2010 < 10

19. Vodovody a kanalizace Hodonín, a.s. water 2010 < 10

20. Vodovody a kanalizace Hradec Králové, a.s. water 2010 < 10

21. Vodovody a kanalizace Jablonné nad Orlicí, a.s. water 2010 < 10

22. Vodovody a kanalizace Kroměříž, a.s. water 2010 < 10

76 Nota bene : Companies are identified primarily on the basis of the 2004 survey. State ownership relates

to the share of the State through direct ownership of company shares. Expiry dates are provided when they figure in the articles of associations, law, or agreement from whence the special rights originate, or when a date has been mentioned by the authorities. As explained in the report this list is not exhaustive as some Member States did not reply to the survey, replied too late to be included in the analysis or gave replies which were unclear.

EN 33 EN

Country Company Industry Expiry date

State ownership (%)

23. Vodovody a kanalizace Mladá Boleslav, a.s. water 2010 < 10

24. Vodovody a kanalizace Náchod, a.s. water 2010 < 10

25. Vodovody a kanalizace Nymburk, a.s. water 2010 < 10

26. Vodovody a kanalizace Pardubice, a.s. water 2010 < 10

27. Vodovody a kanalizace Prostějov, a.s. water 2010 < 10

28. Vodovody a kanalizace Přerov, a.s. water 2010 < 10

29. Vodovody a kanalizace Trutnov, a.s. water 2010 < 10

30. Vodovody a kanalizace Vsetín, a.s. water 2010 < 10

31. Vodovody a kanalizace Zlín, a.s. water 2010 < 10

32. Vodovody a kanalizace Vyškov, a.s. water 2010 < 10

33. Ústav jaderného výzkumu Řež a.s nuclear research none < 10

34. České přístavy, a.s ports none < 10

35. Hřebčín Napajedla live animals 2005 < 10

36. Geofyzika a.s. research institute 2004 unknown

37. Plzensky Prazdroj research institute 2004 unknown

38. Ustav nerostnych surovin a.s. research institute 2004 unknown

39. Finland Gasum Oy gas none 24

40. France Thales defence none 31,3

41. EADS defence 2090 0

42. Germany Volkswagen AG automotive none 0 (Bund)

43. Hungary Hungarian Telecommunications Ltd. (Magyar Telekom) telecom none 0

44. Danubian Aircrafts Ltd. defence none 0,04

45. National Savings and Commercial Bank Ltd. (OTP) banking none 0

46. MOL Hungarian Oil and Gas Industrial Ltd. oil-gas industry none 11,82

47. South Transdanubia Gas Supply Ltd. gas supply none 0

48. Tiszántúl Gas Supply Ltd. gas supply none 0

49. South Great Plain Gas Supply Ltd. gas supply none 0

50. Middle Transdanubia Gas Supply Ltd. gas supply none 0

EN 34 EN

Country Company Industry Expiry date

State ownership (%)

51. North Transdanubia Gas Supply Ltd. gas supply none 0

52. National Powerline Company Ltd. electricity supply none 0

53. Budapest Electricity Works Ltd. electricity supply none 0,09

54. Tiszántúl Electricity Supply Ltd. electricity supply none 0

55. North Hungary Electricity Supply Ltd. electricity supply none 0,01

56. South Hungary Electricity Supply Ltd. electricity supply none 0

57. (South) Transdanubia Electricity Supply Ltd.

electricity supply none 0

58. North Transdanubia Electricity Supply Ltd.

electricity supply none 0

59. Budapest Power Plant Ltd. power plant none 0

60. Tisza Power Plant Llc. power plant none 0,01

61. Mátra Power Plant Ltd. power plant none 0

62. PANNONPOWER Generation Trading and Service Ltd. power plant none 0

63. Bakony Power Plant Ltd. power plant none 0

64. Vértes Power Plant Ltd. power plant none 29,96

65. Dunamenti Power Plant Ltd. power plant none 0

66. Paks Nuclear Power Plant Ltd. power plant none 0

67. Kalocsai Fűszerpaprika Rt food processing industry none 0

68. PICK Szeged Ltd. food processing industry none 0

69. HERZ Salami Ltd food processing industry none 0

70. Zsolnay Porcelain Ltd. manufacturing none 0

71. Hungaropharma Ltd. pharmaceuticals none 15

72. CD Hungary Property Trading and Services Ltd. other services none 0,01

73. HUNGEXPO Fair and Promotion Ltd. other services none 1,99

74. Ireland Greencore Group sugar none 0

75. Italy ENI oil and gas none 20,32

76. ENEL electricity none 50,63

77. Telecom Italia telecom none 0

78. Finmeccanica defence none 59,7

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Country Company Industry Expiry date

State ownership (%)

79. Latvia Latvijas Kugnieciba shipping none 0

80. Latvijas Gaze energy none 0,0003

81. SIA Lattelekom telecom none 51

82. Lithuania Vakaru Skirstomieji Tinklai electricity none < 3

83. Luxembourg SES Global satellite operator none 0

84. Netherlands KPN telecom none 20

85. TNT post none 19

86. Poland Zakłady Przemysłu Tytoniowego S.A., Radom tobacco 31/12/2005 3,6

87. British-American Tobacco Polska S.A., Augustów tobacco 31/12/2005 3,5

88. Philip Morris Polska S.A., Kraków tobacco 31/12/2005 4,493

89. Reemtsma Polska S.A., Tarnowo Podgórne tobacco 31/12/2005 3,421

90. Zakłady Pliva S.A., Kraków pharmaceuticals 31/12/2007 3,09

91. Glaxo Smith Kline Pharmaceutical S.A., Poznań pharmaceuticals 31/12/2007 2,73

92. ICN Polfa Rzeszów S.A. pharmaceuticals 31/12/2007 2,734

93. Zakłady Farmaceutyczne Polpharma S.A., Starogard Gdański pharmaceuticals 31/12/2007 0,000005

94. Grodziskie Zakłady Farmaceutyczne

POLFA Spółka z.o.o., Grodzisk Mazowiecki

pharmaceuticals none 36,98

95. Cukrownia Ropczyce S.A., Ropczyce sugar announced 0,25

96. Cukrownia Strzyżów S.A., Strzyżów sugar announced 0,61

97. Cukrownia Chełmża S.A., Chełmża sugar announced 10,78

98. Cukrownia Krasiniec S.A., Krasiniec sugar announced 3,97

99. Cukrownia Leśmierz S.A., Leśmierz sugar announced 20,39

100. Cukrownia Mełno S.A., Mełno sugar announced 9,18

101. Cukrownia Opalenica S.A., Opalenica sugar announced 4,65

102. Cukrownia Szamotuły S.A., Szamotuły sugar announced 5,96

103. Przedsiębiorstwo

Turystyczno-Gastronomiczne Wierzynek S.A., Kraków

catering 31/12/2008 5,01

104. Zakłady Przemysłu Cukierniczego SKAWA S.A., Wadowice food processing none 31,18

105. Chłodnia Szczecińska Sp. z.o.o., Szczeciń food processing none 49

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Country Company Industry Expiry date

State ownership (%)

106. CHMIEL POLSKI S.A., Lublin food processing none 20,51

107. POLMOS Żyrardów Spółka z.o.o., Żyrardów

alcoholic beverages 31/12/2006 12,08

108. Fabryka Wódek POLMOS ŁAŃCUT S.A.

alcoholic beverages none 0,168

109. Lubelskie Zakłady Przemysłu Spirytusowego i Drożdżowego

POLMOS S.A., Lublin

alcoholic beverages none 4,741

110. Lubuska Wytwórnia Wódek

Gatunkowych POLMOS ŁAŃCUT S.A., Zielona Góra

alcoholic beverages announced 1,111

111. Przedsiębiorstwo Przemysłu

Fermentacyjnego AKWAWIT S.A., Leszno

alcoholic beverages none 0,38

112. Kompania Spirytusowa

“WRATISLAWIA” POLMOS Wrocław S.A.

alcoholic beverages none 0,32

113. Destylernia Sobieski S.A. alcoholic beverages 17/07/2005 4,638

114. Kostrzyńsko-Słubicka Specjalna Strefa Ekonomiczna S.A.

management of special

economic zones none 20,9

115. Legnicka Specjalna Strefa Ekonomiczna S.A.

management of special

economic zones none 45,31

116. Warmińsko-Mazurska Specjalna Strefa Ekonomiczna S.A.

management of special

economic zones none 35,31

117. Specjalna Strefa Ekonomiczna “Starachowice” S.A.

management of special

economic zones none 20,27

118. Suwalska Specjalna Strefa Ekonomiczna S.A.

management of special

economic zones none 40,45

119. Huta Łaziska S.A., Łaziska Górne metallurgical industry none 10,187

120. Rzeszowskie Przedsiębiorstwo Instalacji Sanitarnych, Rzeszów building announced 25

121. PDM Przedsiębiorstwo

Drogowo-Mostowo Sp. z.o.o., Chojnice

building announced 25,5

122. MOSTOSTAL-POZNAŃ S.A. machinery announced 35,75

123. Sjenit S.A. Gumin building materials none 17,85

124. SCANCLIMBER Sp. z.o.o., Gniezno machinery none 5,826

125. GEN-BUD Białystok Sp. z.o.o. timber none 19,69

126. Przędzalnia Czesankowa WELDORO Sp. z.o.o., Bielsko-Biała textiles none 13,793

127. LUBINEX Sp. z.o.o., Lubin textiles none 34,445%

128. Bank Gospodarki Żywnościowej S.A. banking 2004 69,45

EN 37 EN

EN 38 EN

Country Company Industry Expiry date

State ownership (%)

129. PKN ORLEN S.A. fuel and oil 2005 10,2

130. Elektrownia Rybnik S.A. energy none 0,0034

131. STOEN S.A. energy 30/06/2006 0,62

132. Towarowa Giełda Energii S.A., Warsaw energy announced 22,3

133. Fabryka Porcelany Wałbrzych S.A., Wałbrzych manufacturing none 15,56

134. Wydawnictwo Naukowe PWN S.A. publishing none 1,5%

135. Spain Repsol oil and gas 02/2006 2,95

136. Endesa electricity 06/2007 0

137. Telefónica telecom 02/2007 0

138. United Kingdom BAE Systems defence none 1 special share

139. Rolls Royce defence none 1 special share

140. British Energy energy redeemable

after 30/09/2006

1 special share

141. Devonport Dockyard ports none 1 special share