Study on State asset management in the EU · Serviços de Águas e Resíduos”15 (“ESRAR”) to monitor and evaluate the quality of the services offered by private operators; the

Written by KPMG and Bocconi University February 2018

Study on State asset management in the EU

Pillar 4 (Case studies) - The indirect privatisation of

Empresa Geral do Fomento

Contract: ECFIN/187/2016/740792

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EUROPEAN COMMISSION

Directorate-General for Economic and Financial Affairs Directorate Fiscal policy and policy mix and Directorate Investment, growth and structural reforms European Commission B-1049 Brussels

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The indirect privatisation of Empresa Geral do Fomento

This note discusses the indirect privatisation of Empresa Geral do Fomento S.A.,

currently known as Environment Global Facilities (EGF), a company operating in the

waste sector in Portugal. This case study has been chosen in order to provide insights

on an indirect privatisation1 undertaken by the Portuguese government. The

privatisation was meant to comply with the privatisation programme included in the

Memorandum of Understanding (MoU) negotiated with the Commission, the ECB and

the IMF2, to reduce the debt of the public sector holding Aguas de Portugal (AdP); and

to restructure the waste management sector at large, through the entry of a private

investor able to sustain the level of investments required to reach the quality

standards established by the new European directive.

1. INTRODUCTION

EGF is active in the selection, transportation, management and disposal of “Urban

Solid Waste” (“USW”), performing also recycling and energy generation activities. The

company operates in Portugal through 11 subsidiaries, one for each waste treatment

multimunicipal concession3 the company is in charge of, and it is distributed in 278

municipalities, serving more than 60% of the Portuguese population, which produces

around 3.7 million tonnes of waste a year4. In September 2014, the public tender for

the privatisation of EGF was awarded to Serviços Urbanos e Meio Ambiente S.A.

(SUMA5), a consortium led by the Portuguese construction group Mota-Engil, SGPS6,

S.A.7 (Mota-Engil8).

Prior to the privatisation, EGF used to be controlled by Aguas de Portugal, SGPS, S.A.

(AdP9). AdP is a holding company that, through its subsidiaries, designs, constructs,

operates and manages water supply and wastewater treatment systems, acting as the

1 Indirect privatisation refers to a privatization of a company that is indirectly controlled by the State

through one or more PSHs. Control is, in fact, directly exercised by one or more PSHs. 2 To improve the sustainability of public finances, the Portuguese government agreed to undertake an ambitious privatisation programme which encompassed several PSHs operating in the energy, water and waste management, communications, insurance, transportation, ship-building and telecommunications sectors with the objective to raise around 5.5 Bn EUR by 2013. Source: http://ec.europa.eu/economy_finance/publications/occasional_paper/2014/pdf/ocp191_en.pdf. 3 Multiminucipal concessions are concessions granted by different municipalities (located in nearby areas) to a company in order to perform defined activities within their territory. Municialities usually also owns stakes in the company to which they grant the concession. In fact, with regards to EGF, its subsidiaries are also partially owned by the municipalities in which they operate. 4 For additional information on EGF please see: http://www.egf.pt/EN. 5 Headquartered in Lisbon, SUMA is a global operator in the Environmental and Waste sector, with its precense in 6 countries and on 4 continents. For additional information on SUMA please see: http://www.suma.pt/en/index.html. 6 Sociedades Gestoras de Participações Sociais (Management Companies of Social Participations - "SGPS") are Portuguese holding companies. 7 Sociedade Anónima. 8 Founded in 1946, today the Mota-Engil Group is a multinational company with operations focused on construction and infrastructure management in the segments of Engineering and Construction, Environment and Services, Transport Concessions, Energy and Mining. For additional information on Mota-Engil please

see: http://en.mota-engil.pt/. 9 AdP is controlled by Parpùblica SGPS, S.A. (81%) and Parcaixa SGPS, S.A. (19%). The former has been created by the Decree-Law at the end of 2000 to act as an instrument of the State for the management of participations in companies in the process of privatisation in order to support the privatisation processes. The latter is an entity supervised by banco de Portugal. For more information on Parpùblica SGPS, S.A. please see: http://www.parpublica.pt/. For more information on Parcaixa SGPS, S.A. please see: https://www.bportugal.pt/contaoficialdeentidade/parcaixa-sgps-sa-4 [Accessed 8th February 2018].

http://ec.europa.eu/economy_finance/publications/occasional_paper/2014/pdf/ocp191_en.pdf

http://www.egf.pt/EN

http://www.suma.pt/en/index.html

http://en.mota-engil.pt/

http://www.parpublica.pt/

https://www.bportugal.pt/contaoficialdeentidade/parcaixa-sgps-sa-4

Study on State asset management in the EU – Pillar 4

Privatisation - The indirect privatisation of EGF

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state’s business tool for implementing public policies and national objectives in the

environmental sector.

Figure 1 EGF’s ownership structure prior to privatization (and % stakes owned in

each company)

Source: KPMG elaborations on publicly available data

Figure 2 EGF’s operations in Portugal

Source: KPMG elaborations on publicly available data

Although the Portuguese government was planning to privatise both EGF and AdP,

today, the latter is still under control of the state and is no longer part of the

privatisation program. By contrast, the privatisation of EGF was completed, in order to

comply with the privatisation programme included in the Memorandum of

Understanding (MoU) negotiated with the, Commission, the ECB and the IMF and to

restructure the waste sector. In fact, while the country was facing a fierce economic

crisis, the Portuguese government signed a MoU with the Commission, the ECB and

the IMF in May 2011, thanks to which it obtained a loan of 78 Bn EUR to restore

national economic stagnation. In exchange, the Portuguese government had agreed to

implement measures in several areas that would allow it to repay its debt (the so



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called “Financial Assistance Programme”). The measures adopted included regulation

and supervision of the financial sector, of public private partnerships, of the labour

market, of the housing market, of the judicial system (insolvency proceedings) and

competition, of public procurement and business environment. The objectives at the

basis of the Financial Assistance Programme consisted in bringing Portuguese deficit

below the 3% threshold by 201310.

Moreover, the MOU also included the implementation of an aggressive privatisation

programme of national Public Sector Holdings11 (PSHs)12, operating in the energy,

water and waste management, communications, insurance and transportation sectors

with the objective to raise about 5.5 Bn EUR11.

After the completion of the privatisations initially defined in the Financial Assistance

Programme, the Portuguese governement continued to privatise other PSHs in order

to reduce PSHs’ operational costs and debt burden. EGF was one of the companies

selected. This choice was also influenced by the need to restructure the entire waste

sector in order to promote more efficient and cost-effective solutions and to ensure

the provision of systems of public service excellence to users, the economic and

financial sustainability of the systems and the reduction of tariffs.

The objectives of the transaction can be summarised as follows:

to increase the efficiency of waste management systems with a consequent

reduction in costs;

to guarantee access and improve the quality of services provided to the

population;

to harmonize tariff disparity arising from the peculiarities of the different

systems and regions of the country;

to face current and future social problems related to access to services;

to reduce AdP’s financial debt;

to ensure an adequate level of investments in order to comply with European

and national regulation in the waste sector.

2. CONTEXT AND IMPLEMENTATION

Following the definition of the privatisation programme, in order to ensure an

adequate national regulatory framework for coming privatisations, the Portuguese

government established additional rules to be applied to the Privatisation Law 11/90 of

5 April 1990, as amended by Law 50/2011 of 13 September 2011.

Among other things, the privatisation law defined the procedures through which PSHs

can be privatised13 and the methods to dispose of the companies, which are:

public tender;

10 Source: http://ec.europa.eu/economy_finance/eu_borrower/mou/2011-05-18-mou-portugal_en.pdf 11 Public Sector Holdings (PSHs) are non-financial and financial companies located (registered) in one of the EU28 countries, in which one or more Public sector entities own either a direct or indirect stake 12 Source: www.macedovitorino.com/xms/files/20120727-The_Portuguese_Privatisation_Programme.pdf 13 Two types of precedures are admitted by the Privatisation Law: (i) selling of shares, (ii) shared capital increase.

http://ec.europa.eu/economy_finance/eu_borrower/mou/2011-05-18-mou-portugal_en.pdf

http://www.macedovitorino.com/xms/files/20120727-The_Portuguese_Privatisation_Programme.pdf



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direct negotiation;

initial public offer;

public subscription.

The choice among these methods is made by the government, which will consider the

specific situation of each company involved.

In the case of EGF’s privatisation, as it will be shown in more detail later on (see

section 3), given the attractiveness of the company, the Portuguese government

decided to undertake an international public tender. However, before that, in order to

keep control over the sector, it also established specific measures to guarantee

adequate standards in terms of economic and environmental sustainability and quality

of service to the citizens.

In particular, the main measures adopted by the Portuguese government and the

related entities were the following:

the definition of the “Strategic Solid Urban Waste Plan” for the 2014-2020

period (“Plano Estratégico para os Resíduos Urbanos” – “PERSU 2020”14), to

establish specific objectives to be reached in terms of quality standards,

minimum recycling quantities, etc. also in coherence with European Directives;

the reinforcement of the powers attributed to the “Entidade Reguladora dos

Serviços de Águas e Resíduos”15 (“ESRAR”) to monitor and evaluate the quality

of the services offered by private operators;

the change in the regulatory framework for the definition of tariffs, from the

“cost plus model16” to the “revenue cap model17”;

the review of the statutory regulation (Decree Law approved on 5th August

2014) for the revision of future concession contracts for the operation and

management of collection and treatment of municipal waste, with defense of

the public and municipal interest, and guarantees of the transfer of the

infrastructures affected to the concession to the Municipalities at the end of the

term of each concession18.

14 Approved by the Ministry of Environment and Energy through the Ordinance no. 187-A, of 17th September 2014. 15 In 2014 (Law no. 10 of 06th March 2014), ERSAR became an independent body with more autonomy and strenghened sanction and regulation powers. For additional information on ERSAR please see: http://www.ersar.pt/en. 16 The “cost plus model” defines the tariff on the basis of the expected costs to which is applied an additional cost to ensure the return of shareholder capital. Since it was developed on the assumption that all operators were part of the public sphere and operating exclusively for public interests, it could generate the negative effect of not encouraging efficiency with private operators. 17 The “revenue cap model” defines total allowable revenues based on a Regulated Assets Base Model ("RAB Model") that creates incentives for operators to optimize the management and cost of providing services. Moreover it provides the reinforcement of ERSAR's competences, which will determine the permitted revenues and tariff. 18 Source: Governo do Portugal, Ministero do Ambiente, Ordenamento do Territorio e Energia, Alienação de Capital da EGF – Empresa Geral do Fomento (Portuguese government: Ministry of Environment and Enery, Disposal of the share capital of EGF – Empresa Geral do Fomento).

http://www.ersar.pt/en



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3. ANALYSIS OF THE DEAL

The shares of EGF were disposed of through an international public tender carried out

in accordance with Law No. 11/90 of 5th April, in order to ensure transparency of the

procedure and equal treatment of all interested parties.

The international public tender framework included the following aspects and

objectives:

selling shares representing up to 100% of the share capital of the company;

maintaining public ownership of the infrastructures within the concession

contracts expiring in 2034;

using the resources obtained from the transaction for the payment of AdP's

debt;

reserving a tranche of up to 5% for a share offering to EGF’s employees.

The analysis and selection of binding proposals was based on the following main

criteria:

price for the acquisition of EGF’S shares;

quality of the strategic project;

compliance with the environmental requirements of existing legislation and

national environmental (PERSU 2020) and EU objectives;

knowledge and technical and managerial skills in the management of relevant

infrastructures (e.g. technical experience and management of waste

management systems);

suitability and financial capacity, as well as any guarantees provided to fulfill

the above criteria.

After the reception of three binding proposals, in September 2014, SUMA won the

tender through an offer of 149.9 Mn EUR for the acquisition of 95% of EGF’s shares19.

Currently, 5% of the shares are owned by the company’s employees.

4. IMPACT ASSESSMENT

In the following section, the impacts of the indirect privatisation of EGF on the target

company performance, on public finance and other impacts are analysed. The analysis

has been performed using publicly available data. Although EGF does not consolidate

its financial accounts, the annual reports present some aggregated data, related to its

11 subsidiaries, which have been used for the scope of this analysis.

Please note that the impact assessment is mainly based on the comparison between

trends and performances registered by the company before and after the completion

19 After the award of the international public tender offer, the operation has been subject to Portuguese Competition Authority that has unconditionally cleared the acquisition by SUMA of EGF after a phase II investigation on 28th July 2015.



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of the transaction, also with regard to the effects on public finances and people

involved. Therefore, no counterfactual assessment has been carried out, being beyond

the scope of this case study, as well as being very challenging with respect to the “do-

nothing” scenario.

4.1. Impacts on the target company

The indirect privatisation of EGF has been performed to pursue several objectives

among which the achievement of an adequate level of efficiency of the waste

management systems in order to comply with European and national regulations in

the waste sector.

In the following section the impacts of the operation are analysed in terms of impacts

on market share, profitability, financial solidity and solvency.

Market positioning

EGF operates exclusively in Portugal through concessions with the municipalities.

Therefore a benchmark analysis can be provided only within the national market. For

this reason, EGF’s market share has been analysed through the analysis of the total

amount of EGF’s USW treated, population served and geographical area served

compared with the total amount of USW treated in Portugal, Portuguese population

and the Portuguese geographic area, respectively.

Figure 3 provides hints on the market share analysis of EGF before and after its

privatisation. As the figure shows, although EGF is treating a lower percentage of

municipal waste in respect to total Portuguese USW after the privatisation, it is still

operating in the same area size and serving the same size of the population as before.

Figure 3 Market share of EGF, 2012–2016

Source: KPMG elaborations on EGF’s annual reports.

Profitability

EGF’s total operating revenues have slightly increased in the last five years (+30 Mn

EUR), while both the EBITDA and the net income did not show significant

improvements in 2015 and 2016 compared to the period prior to the privatisation.

Nonetheless, in terms of the Return on Assets, the company improved its results

considerably, mainly through the reduction of total assets. In fact, as already

explained, most of the assets remained public after the privatisation. Despite that, the

company was able to generate, in percentage terms, higher returns.

40

50

60

70

63.564.1

2013

68.3

2012 2016

+1%

20152014

65.364.2

+5%

Privatisation

%

EGF’s Municipal Waste

Privatisation

%

EGF’s population and area served

6060606060

5252525252

40

50

60

70

2012 2013 2014 2015 2016

Area served by EGF (%)Population served by EGF (%)



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Figure 4 Profitability profile of EGF, 2012–2016


Efficiency

After the completion of the deal, the company maintained the same costs structure.

This can be inferred by the fact that the EBITDA margin did not change after the

indirect privatisation. Moreover, also in terms of costs of employees as a percentage of

total operating revenues, there are no relevant dfferences between the period before

and after the completion of the deal.

Figure 5 Efficiency profile of EGF, 2012–2016


Solvency

The Net Financial Position (“NFP”) of EGF has been considerably reduced after

privatisation, leading the company to a more sustainable situation in terms of its

ability to pay off its incurred debt. In particular, as shown in Figure 6, the NFP/EBITDA

ratio decreased to well below 3.0 (the common reference level below which a company

is considered to generate enough cash to repay its debts), reaching 0.7 in 2016.

0

50

100

150

200

2013

172.7

2012

157.4169.7

179.9

2014 20162015

+10% +3%

185.7

Privatisation

Mn EUR

Operating revenues

0

50

10

20

40

60

30

70

2014

57.3

2013

+10%

66.3

2015

0%

2016

66.667.2

60.9

2012

Privatisation

Mn EUR

EBITDA

12

16

14

2

6

4

8

10

0

15.5

9.0

15.2

2012 2013

15.3

11.7

2014 20162015

Privatisation

Mn EUR

Net Income

0

5

10

15

20

25

30

2012

+29%

+13%

2015

18.7

2013 2016

28.0

21.6

2014

18.316.2

Privatisation

%

ROA

0

5

10

15

20

25

30

2012

+8%+1%

2015

24.2

2013 2016

25.223.3

2014

25.925.6

Privatisation

%

Cost of employees as % of operating revenues

20

25

30

35

40

2012

-3%

+1%

2015

33.8

2013 2016

35.737.0

2014

38.938.7

Privatisation

%

EBITDA margin



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Figure 6 Solvency profile of EGF, 2012–2016


4.2. Impacts on public finance

Since the EGF was indirectly controlled by the state, impacts on public finance cannot

be measured directly. However, in order to tentatively evaluate the financial impact

from the privatisation, and to the extent that these can be considered as a proxy, the

benefits of the operation on AdP are reported.

Indeeed, AdP benefited from 149.9 Mn EUR paid by SUMA to buy EGF’s shares that, as

stated in the international public offer, were earmarked to repay AdP’s debt. It also

benefited from large investments (about 35 Mn EUR between 2015 and 2016 for

tangible and intangible assets) conducted by SUMA after the acquisition of the

company to increase the efficiency of the waste system.

Figure 7 Evolution in total investments of EGF, 2015–2016


4.3. Other impacts

In order to evaluate other impacts deriving from the transaction, the trend in the

average tariff applied by the company for waste management services, and the trend

in the total number of employees have been analysed. Although the quality of service

could give some additional information, an analysis on this has not been performed

due to the challenges in defining appropriate measures to evaluate it.

As Figure 8 shows, the average tariff (EUR/tonne) applied by the company before and

after the completion of the indirect privatisation does not show significant differences,

especially when comparing 2012 levels with those registered in 2016.

200

50

100

150

250

0

-48%

-13%

83.7

2014

43.2

2015

220.8

176.9

2012 2013

192.5

2016

Privatisation

Mn EUR

Net Financial Position (NFP)

3.5

2.0

0.0

0.5

1.0

1.5

2.5

3.0

4.0

2012

-48%

20162014

-21%

2013

2.9

2015

3.1

1.3

3.6

0.7

Privatisation

NFP / EBITDA

0

15

10

20

25

5

30

2016

25.5

9.3

2015

Mn EUR



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Figure 8 Evolution in the average tariff of EGF, 2012–2016


A similar conclusion can be drawn regarding the total workforce, which has increased

by only 68 people (+3.4%) with respect to 2012 level.

Nonetheless, both figures show some interesting trends: the average tariff increased

from 2012 to 2014 and decreased after the completion of the deal; similarly, the total

number of employees decreased from 2012 to 2015 and increased in 2016.

Figure 9 Evolution in the number of employees of EGF, 2012–2016


Table 1 provides a synthesis of the major impacts identified above. The results are

presented by means of a RAGS (i.e. Red; Amber; Green; Silver) classification. In

detail: “Red” stands for a negative impact, “Amber” for no clear patterns for the

impacts, “Green” stands for a positive impact/s and “Silver” stands for no data

available for the analysis. As already mentioned, this analysis of the impacts is mainly

based on the comparison between trends and performances registered by the

company before and after the indirect privatisation of EGF, and does not provide a

comparison with a counterfactual scenario.

20

22

24

26

28

30

+7%

2016

25.6

2015

-2%

25.3

26.2

2013

27.0

20142012

27.1

Privatisation

Tariff

EUR / ton

1,500

2,000

2,500

500

1,000

0

-5%

+16%

20152013

1,769

2012

1,9881,888

2016

2,056

2014

1,796

Privatisation

Number of employees

#



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Table 1 Summary table of potential impacts

Summary of potential impacts

Impacts on the target company

Market positioning

Scoring

A

In terms of market positioning of EGF, the

analysis performed does not show significant

changes between the company market share

before and after the completion of the deal.

In fact, in 2015 and 2016, both the

geographical area and the population served

as well as the USW quantities have remained

at the same level as before the deal closing.

Profitability

Scoring

G

EBITDA and Net Income did not show

significant changes before and after the

completion of the deal. Nonetheless, both

ROA and to a lesser extent total revenues

have shown a noticeable increase in the

years after the completion of the deal.

Particularly, the ROA increased at a

considerable rate generating returns above

the average which can lead to the

conclusionthat the privatisation has had

positive effects on EGF’s profitability.

Efficiency

Scoring

A

The efficiency ratios of EGF do not show

significant changes before and after the

completion of the deal, meaning that, at

least until now, the new management has

not been able to generate cost synergies

from the acquisition.

Solvency

Scoring

G

After the completion of the deal the company

has generated high levels of cash flows that

impacted positively on its Net Financial

Position, improving its solvency considerably.

Impacts on public finance

Fiscal impacts

Scoring

A

Since EGF was not directly owned by the

state, there are no direct fiscal impacts on

public finance deriving from its disposal.

Other impacts

Impacts on Scoring



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Summary of potential impacts

customers

A

While in the years before the privatisation

EGF increased the average tariffs for the

services provided, after the completion of

the deal and the related introduction of the

new tariffs framework, there has been an

inversion of this trend with a reduction of the

average tariff. Nonetheless, the average

tariff in 2016 was almost the same as in

2012.

Impacts on EGF’s

workforce

Scoring

G

EGF’s workforce has benefited from the

privatisation, with the increase in the

number of employees.

Source: KPMG elaborations

5. CONCLUSIONS AND LESSONS LEARNT

This case study represents an example of an indirect privatisation undertaken by the

Portuguese government, for two main reasons. On one hand, in order to to comply

with the Financial Assistance Programme signed with the Commission, the ECB and

the IMF; and, on the other hand, to respond to the need of restructuring the waste

management sector to reach economic sustainability objectives and increase efficiency

of the service, as also required by European directives.

In particular, this case highlights the intervention of the state in the regulation of both

privatisation and sector restructuring. In fact, relating to the former, before the

implementation of the privatisation program agreed with the Commission, the ECB and

the IMF, the Portuguese government defined new, specific regultions to establish a

solid framework for privatisations, in order to ensure transparency and maximizing the

potential benefits from the transaction. Relating to the latter, before publishing the

international public offer, the Portuguese government defined an entire new set of

regulations with the objective to render the waste sector more efficient and

sustainable.

In conclusion, the impact analysis has shown that the indirect privatisation of EGF

generated positive impacts on company’s profitability, solvency and workforce.

Nonetheless, it has not been possible to define a clear pattern of impacts of the

indirect privatisation on EGF’s efficiency and on the Portuguese public finance and

citizens, also because of the fact that the company was controlled by the government

in an indirect way.

R

Legend

= Negative impact GA = No clear pattern = Positive impact S = No data available

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Study on State asset management in the EU · Serviços de Águas e Resíduos”15 (“ESRAR”) to monitor and evaluate the quality of the services offered by private operators; the