Pros and cons of privatizing Estonian state-owned companies AS Eesti Post and AS EVR Cargo

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Pros and Cons of Privatizing Estonian

State-Owned Companies AS Eesti Post and

AS EVR Cargo

Abstract

This BSc Economics and Business final thesis is focusing on the pros and cons of privatizing Estonian state-owned companies AS Eesti Post and AS EVR Cargo. The aim was to define the pros and cons of privatizing those companies, as well as, the pros and cons of different privatization methods. The privatization methods analyzed were initial public offering, majority share privatization and minority share privatization. In addition, detailed market value analysis were undertaken to get more insights to the values of the companies and to potential selling prices. The research was done during the internship in the Ministry of Economic Affairs and Communications for Estonia, as an assistant for the advisor of the Minister of Economic Affairs responsible for the state-owned companies. The data was collected through interviewing high officials of the Ministry and the management teams of the investigated state-owned companies, as well as, through observations done at the meetings related to the privatization and through analyzing the documents created by the companies and the officials of the Ministry. The research draws a conclusion about which privatization method is preferred to other ones, and proposes the solutions of how to increase the attractiveness of the companies for the investors. The general conclusion is that the privatization to strategic investor is the most preferable privatization method for both companies. This research builds a fundament for further in-depth analysis of the privatization process of AS Eesti Post and AS EVR Cargo.

Sten-Erik Mägus 10653775 27-06-2016 2015/2016 Supervisor 1: MSc Erik Dirksen Supervisor 2: TBA Project 4: BSc Economics & Business Bachelor’s Thesis

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(13.05.2016) ... 56 9.2.4 Interview with the deputy secretary general for Transport, Ahti Kuningas (22.04.2016) ... 59 9.2.5 Interview with CEO Raul Toomsalu and CFO Paul Lukka of AS EVR Cargo (31.05.2016) ... 62 9.2.6 Interview with Economic Development Department Analyst Regina Raukas (28.05.2016) ... 65

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1. Introduction

According to Megginson and Netter (2001, p. 321) privatization can be defined as a deliberate sale by government of state-owned enterprises or assets to private

economic agents. The aim is to overcome the inefficiencies caused by state-ownership and to promote increased efficiency, introduce competition, expose state-owned companies to market discipline, encourage foreign investment, foster wider share ownership, and to raise revenue for the state (Megginson, 2000, p. 17). Martimort and Econ (2006, p. 9) argue that the state has a limited ability to commit, and thus the public ownership may have greater costs than benefits. Therefore, private ownership is likely to be preferable to public ownership (Megginson and Netter, 2000, p. 330)

The first major privatization took place in the early 1960s, when the stakes in Volkswagen and the industrial company VEBA were sold to private investors by the government of German Chancellor Konrad Adenauer (Megginson, 2000, p. 17). When the economic liberalism by the end of the 1970s had gained majority support among the voters in United Kingdom and elsewhere, the privatization became to dominate public policy in Western countries (Arndt, 1998, p. 334). Since, its

introduction of large-scale privatizations by UK’s prime minister Margaret Thatcher, privatization now appears to be accepted as a core tool of state-craft by governments all around the world (Megginson and Netter, 2001, p. 321). Even though the world has been privatizing many public companies and local services with the aim of reducing public debt and expenditure, as well as increasing efficiency, governments still control a large portion of the firms, especially those in strategic sectors, such as utilities and transportation (Berg and Berg, 1997, p. 16). Megginson (2000, p. 25) argues that some governments have privatized only the least controversial state owned companies and have often retained stakes in the most important companies.

Megginson (2000, p. 14) argues that privatization represents an ideological and symbolic break with a history of a state control over a country’s productive assets, and the symbolism has not been more apparent anywhere else than in the economies of former Soviet Union. Privatization in former Soviet Union countries, including Estonia, has represented a transition period from communism to democratic capitalism (Megginson, 2000, p. 14). Jones and Mygind (1999, p. 438) argue that Estonia, where the large-scale privatization was virtually completed by late 1997, is often listed as one of the most successful transition economies. The former prime

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minister Mart Laar, who adopted the policies of UK’s Margaret Thatcher and who is known as the godfather of privatization in Estonia, stated that “it is impossible to have an effective free market, without restoring the value of the property and without giving the businesses back to private sector” (Stuttaford, 1993, p. 23). As former Estonian Economy Minister Toomas Sildmäe, who was largely involved in

privatizing Estonian state-owned companies in 1993-1994, stated, “the focus was on creating a framework for the normal development of business rather than managing that business” (Stuttaford, 1993, p. 23). The hope was that private investors take up the slack left by retreating state sector and in that way support the development of the economy, however, the process was not that smooth and the allegations of corruption and spontaneous privatizations were usual problems (Stuttaford, 1993, p. 23). The large-scale privatization was not achieved by one set of privatization initiatives but was accomplished by a series of initiatives, where in the first stage between 1989-1991 many concessions were made to insiders (Jones and Mygind, 1999, p. 438). In the second stage between 1991-1992 some stock transfers were made to employees, but from 1993 onwards the Treuhand model was in use that refers to independent government agency established for managing privatizations (Jones and Mygind, 1999, p. 438). Even though, the results of mixed and sometimes poor privatization methods are noticeable in the society, the ultimate goal of the policy makers was achieved that aimed to defend the newly independent state, to endorse the neoliberal ideology of privatization, deregulation and lean state, to severe all ties with Russia and to commit to Western integration (Bohlee, 2014, p. 922).

The transfer of the state owned companies to private investors changes the basic purpose away from political goals and social welfare maximization to profit maximization and efficiency (Megginson, 2000, p. 15). Many authors argue that due to the shift of the objective of the firm towards profit maximization, private firms perform better than public companies (Martimort and Econ, Mühlenkamp,

Megginson). Privatization is advisable because it brings fiscal relief, generates new revenues for the government, increases efficiency of the company, increases

competition, facilitates entrepreneurship, and more (Berg and Berg, Megginson and Netter). Nevertheless, privatization has not ended state involvement in the economy, but has transformed its role – from the direct production of goods and services to supervisory and regulatory role (Megginson, 2000, p. 22). According to Berg and Berg (1997, p. 359) the classic type of privatization is the sale of full or partial

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ownership of a state enterprise that can be split into three categories: public offering on stock exchanges, competitive bidding, and noncompetitive sales or transfers. The competitive bidding and noncompetitive sales can be split to majority or full share sale and minority share sale.

Currently, there are 18 state-owned companies that Estonian Ministry of Economic Affairs and Communications have the ownership responsibility. Most of these are serving strategic purpose and are important for maximizing social welfare. However, two of those 18 companies have no social purpose, have profit

maximization nature, and according to the assumptions made by the officials of the Ministry and the management of the companies, can perform well on private sector.

The central research question of this paper is: what are the pros and cons of privatizing state-owned companies AS EVR Cargo and AS Eesti Post? The focus is on evaluating different privatization methods, and the positive and negative impacts of each privatization method to the company and to the owner (state). In addition, the required optimization process will be defined, the market values of the companies will be calculated, and the optimal time span assessed where the market value would be highest.

Following the introduction, an in-depth analysis of literature concerning the pros, cons and methods of privatization will be made. Further, the theoretical model will be formulated that addresses the methods and methodology, and presents the companies to be investigated. Next, the data will be analyzed and the results presented. And finally, the last part draws the conclusion to the research.

2. Literature review

Megginson and Netter (2001, p. 365) argue that in most countries privately owned firms perform significantly better than state-owned firms. According to Megginson and Netter (2001, p. 365), privatization has had a larger positive impact in non-Commonwealth of Independent States countries, Eastern and Central Europe, and the Baltic states compared to CIS countries; however, evidence indicates that even firms in CIS countries and Russia have benefitted in increased performance. The fact that economic performance of public enterprises is most often regarded as inferior to that of private enterprise, is not only supported by certain political parties, but also

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international organizations like the World Bank and the International Monetary Fund (IMF) (Mühlenkamp, 2013, p. 535).

Megginson and Netter (2001, p. 324) note that according to Price Waterhouse (1989), the goals of privatization are raising revenue for the state, promoting

economic efficiency, reducing government interference in the economy, promoting wider share ownership, providing the opportunity to introduce competition, and subjecting SOEs to market discipline, as well as developing national capital market. Megginson (2000, p. 17) adds that privatization enables the government to encourage foreign investment. Berg and Berg (1997, p. 359) also argue that the main objectives are fiscal relief by cutting subsidies of money-losing companies and generating new revenues from the sales, and that privatization leads to efficiency of the entire

economy through more competitive markets and better allocation of resources across firms and sectors. Furthermore, Berg and Berg (1997, p. 359) argue that increased political support and broadened institutional underpinnings for a market-based economy or further liberalization, stronger financial markets, increased investment and the stimulation of entrepreneurship are the outcomes of successful privatization.

According to Megginson and Netter (2001, p. 331), governments have raised huge amounts of money by selling state owned enterprises, which have helped reducing the fiscal deficit. Megginson (2000, p. 19) argues that privatization helps governments balancing their books and eliminating the need for subsidizing loss-making enterprises. Since, most of the money raised through privatizing has flowed directly to governments, the governments have raised more than $1 trillion without raising taxes or cutting benefits (Megginson, 2000, p. 19). Megginson (200l, p. 17) notes that studies about privatization document increases in output, efficiency, profitability, investment spending, and dividend payouts, as well as significant

reductions in their debts. Megginson (2001, p. 23) also argues that privatization of the companies have benefited consumers from lower prices, wider access to higher quality services, greater competition, and increased choice. While pricing and quality of regulated utilities such as electricity, gas and water have improved significantly in most privatizing countries, the enhanced provision of telecommunication services is one of privatization’s most significant contributions (Megginson, 2001, p. 23).

Even though, some scholars expect the unemployment rate to increase, due to the fact that private company is not concerned with social welfare maximization and seeks for efficiency and thus may lay-off unnecessary workers (Galal, Jones, Tandon,

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1997, p. 829), Megginson (2001) states the opposite. Megginson (2001, p. 23) notes that since the sales revenues increase after the privatization, aggregate employment stays the same or even increases compared to the pre-privatization situation, due to the need of competent workers. Moreover, studies have noted that workers who stay with the company have shown significant productivity increases due to increased motivation levels (Megginson, 2001, p. 23).

According to Megginson and Netter (2001, p. 330) government ownership of firms result in problems in defining the goals – while private companies have a well-defined corporate goal of maximizing shareholder-wealth, then public companies have other objectives. Moreover, those goals may change over time when

administrations change (Megginson and Netter, 2001, p. 330). Martimort and Econ (2006, p. 7) argue that since democratic governments have limited tenure and cannot commit their successors to the policies they choose, the contracts between

government and the private sector are incomplete and leave much scope for

renegotiation and ex post barging. Megginson and Netter (2001, p. 330) argue that the government’s inability to commit significantly reduces the efficiency and governance of state-owned companies. In addition, since public ownership gives access to

information which can be used to reduce the firm’s subsidies and extract more rent from the firm’s management, underinvestments and low power incentives are pervasive in public firms according to studies (Martimort and Econ, 2006, p. 7).

Megginson and Netter (2001, p. 330) argue that even if the aim of the

government is to maximize social welfare, it is a difficult thing to measure and use in guiding policy. In addition, government’s goals may be inconsistent with efficiency and social welfare maximization and cause agency problems (Martimort and Econ, 2006, p. 9). The problems with arising agency costs in publicly owned companies also support the phenomenon of privatization since there is a broader range of monitoring devices under private ownership (Megginson and Netter, 2001, p. 330). Due to the fact that relinquishing control rights to the private sector puts a constraint on the opportunistic behavior of biased political principles, privatization may replace a missing incentive scheme for politicians (Martimort and Econ, 2006, p. 9). Moreover, the lack of expertise or technology of the government to exert the internal control of the firm that refer to control of inputs and contracts with suppliers, restricts access to the capital market and design of the management’s incentive schemes (Martimort and

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Econ, 2006, p. 8). Usually, private companies have higher ability to exert such complete internal control (Martimort and Econ, 2006, p. 8).

Since the state is unlikely to allow a large state-owned company to face bankruptcy, the public firms face soft budget constraints (Megginson and Netter, 2001, p. 331). Soft budget constraints lead to the situation where the threat of

financial distress is less important than for privately owned companies, and since the incentives of reducing costs are smaller for public firms, the soft budget constraints are a major source of inefficiency (Martimort and Econ, 2006, p. 8). Even if the public firm is making losses, there may still be political or economic gains that help to increase social welfare or benefit politically biased opportunities (Martimort and Econ, 2006, p. 8).

According to Martimort and Econ (2006, p. 29), the only reason why a state should be owner of a company is for maximizing social welfare. Mühlenkamp (2013, p. 539) argues that politicians may treat public enterprises as an instrument for the pursuit of political goals. Those socio-economic and non-market output goals refer to correcting income distribution, employment rates, investment levels, the provision of capacity and more (Mühlenkamp, 2013, p. 539). He further argues that there is not enough statistical evidence to support argument of most cited publication by Megginson and Netters (2001) that privately owned firms are more efficient than otherwise-comparable state-owned firms (Mühlenkamp, 2013, p. 553). The results of Megginson and Netters (2001) work and the studies of other pro-privatization

scholars hold only if using profitability measures, but the results do not hold if other adequate performance indicators like productivity, cost or welfare are used

(Mühlenkamp, 2013, p. 553).

Kwoka (2005, p. 624) argues that there are specific circumstances under which public ownership is preferred – such are response to the problem of informational asymmetry that besets traditional regulation of a privately owned natural monopoly. Shapiro and Willig (1993) argue that public ownership enables better to secure the information necessary to monitor enterprise behavior for consistency with social objectives. As well as, in the case when output has important non-specifiable attributes, the public enterprise may be superior – contracts with private providers must set out the price and quality of the service to be rendered, but if quality is more difficult to specify in all relevant dimensions, such quality will be undersupplied (Kwoka, 2005, p. 624).

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According to Berg and Berg (1997, p. 359) the classic type of privatization is the sale of full or partial ownership of a state enterprise that can be split into three categories: public offering on stock exchanges, competitive bidding, and

noncompetitive sales or transfers. In addition to those three, partial privatization with the minority share sale is also investigated.

By privatizing through public offering on stock exchange means that the state sells to the general public through the stock market and other financial institutions all or a substantial part of the stock it holds in a going concern (Berg and Berg, 1997, p. 361). Megginson and Netter (2001, p. 340) argue that public offerings as a method of privatizing are more often used when capital markets are less developed, presumably as a way to develop capital markets. Moreover, the governments choose to privatize the more profitable state-owned companies through public offerings (Megginson and Netter, 2001, p. 340). The public flotation is politically appealing, has great revenue-raising potential and it allows broad ownership, which is always more popular than a sale to powerful domestic or foreign buyers (Berg and Berg, 1997, p. 361). Since public flotation allows targeting of particular groups to meet political objectives or social purposes, and the prices are set by the market for all to see and for anyone to buy, it is both flexible and transparent (Berg and Berg, 1997, p. 361). Megginson (2000, p. 17) argue that governments deliberately set the share price below expected market prices to allow citizen shareholders reap short-term capital gain and thus win more public support. In addition, public offerings allow the sales to be organized in tranches, where the first tranche prices and conditions being designed to win

acceptance, and later tranches set at higher prices to benefit from improved enterprise performance and better knowledge in the market about the privatized firm (Berg and Berg, 1997, p. 362). Megginson (2000, p. 19) notes that the transparency of public offerings and the high-profile nature of those events attract many investors that are likely to push up the share price. However, the characteristics that make IPOs attractive, also make them hard to implement – creating clarity, flexibility and transparency in preparation for sale, valuations and managing the offer bring high transaction costs (Berg and Berg, 1997, p. 362). Moreover, companies must be made attractive to buyers by often restructuring, government absorption of debt and new investments, which are all very expensive activities, in addition, market conditions have to be right as well (Berg and Berg, 1997, p. 362). Governments may seek a high price to achieve its revenue objective, but in order to reach the objectives of winning

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political and market acceptability; initial price has to be relatively low (Berg and Berg, 1997, p. 362). However, pricing shares too low not only invites later political attack, but erodes another objective of widespread popular ownership – low-income buyers and employees tend to sell their holdings if share prices rise rapidly after initial offering (Berg and Berg, 1997, p. 362). Moreover, public offerings result in diffuse ownership and give no assurance that assets will be better managed than under government ownership, especially concerning the state-owned companies that have been operating in competitive markets and hence have not been inefficiently

managed. Therefore, the sale to strategic investors who can bring about restructuring through better management, new investment and access to new markets is preferable to IPO (Berg and Berg, 1997, p. 363).

According to Berg and Berg (1997, p. 366), sale of either part or all of a state-owned company’s shares or assets by competitive bidding is the most common privatization worldwide. Auctions are quick, present few valuation problems and can generate revenue for the state budget, while the problems of asymmetric information are relatively small (Berg and Berg, 1997, p. 366). The accounts of the firms to be sold have to be brought up-to-date and audited, outstanding liabilities and asset values determined and future profitability estimated (Berg and Berg, 1997, p. 366). Pre-privatization analyses should yield suggested minimum selling prices and should result in the preparation of and information memorandum for potential bidders (Berg and Berg, 1997, p. 366). Berg and Berg (1997, p. 366) note that governments are frequently interested in other terms of sale besides price – whether the transaction will be for cash, and whether the buyer commits to maintaining employment or injecting new investment. Berg and Berg (1997, p. 367) state that some companies cannot be privatized as going concerns (share sales) because uncertainties about their contingent liabilities are too great. In this case they can be dissolved and liquidated and their assets sold without attached liabilities, whereas new company then rises from the ashes (Berg and Berg, 1997, p. 367). Buyers of companies that are sold using

competitive bidding method are usually technical partners or core investors who will take over management and will have incentives to enhance profitability – this means cost-cutting, increased productivity through better organization and new investment and a search for new market opportunities (Berg and Berg, 1997, p. 367). These objectives of increased investment and new market penetrations are usually achieved by sales to foreign investor (Berg and Berg, 1997, p. 367).

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The third type of classical privatization method is a noncompetitive sales or transfers. The state may find it advisable to sell to a preselected buyer without competitive bidding if a good strategic investor have made an offer that meets the government’s price and other requirements (Berg and Berg, 1997, p. 369). These kinds of sales may be accompanied by public offerings (IPOs) (Berg and Berg, 1997, p. 369). Noncompetitive sales can be cheaper, easier and quicker than alternative methods, especially if the particular technical partners with special competence can be sought out, creating good prospects for more efficient management (Berg and Berg, 1997, p. 370). According to Berg and Berg (1997, p. 370), negotiations can be more flexible than those in formal bids, and political and social objectives can be well-targeted. Fluck, John and Ravid (2007, p. 2745) argue that private negotiations may raise more value than auctions when agent-in-charge highly values staying in office and uses his barging power to negotiate his target price. Even though, noncompetitive approaches may satisfy many objectives, they are inherently less transparent than competitive methods, and such transactions are often attacked as unfair and corrupt (Berg and Berg, 1997, p. 370). Megginson (2000, p. 19) argues that the

nontransparent manner of asset sales give insiders the chance to manipulate the transaction in their favor, and advises the government representatives to consider other alternatives.

According to Gupta (2001, p. 2) the partial privatization allows the

government to raise the revenue without transfer of control. While the company is still following the rules set by the state, it appears that partially privatized companies have higher sales, profits, labor, average product of labor, assets, and returns to labor than firms that remain 100% state-owned (Gupta, 2001, p. 13). It also appears that there is a significant decrease in the average share of government loans in total borrowing after partial privatization (Gupta, 2001, p. 14). Moreover, partial

privatization gives state the power to protect the public interest (Beishem et al, 2012, p. 35). However, minority share privatization reduces incomes that the government makes from the sale and diminishes the willingness of the minority share investors to make large capital investments in the company (Beisham et al., 2012, p. 35).

According to Beisham et al. (2012, p. 35), these are the key reasons for privatizing in the first place, thus minority share privatization does not satisfy the governments’ aim of privatization. In addition, according to Gupta (2005, p. 14) soft budget constraints remain with partial privatization, and soft budget constraints are expected to have

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negative impact on firms’ performance if they are used by the government to pursue other objectives. Thus, the revenue raised for the state is lower with the partial privatization, because investors are not interested to pay as much as they would with the transfer of control, and the efficiencies and profit maximizations will be

unrealized without the transfer of control (Gupta, 2001, p. 15). To conclude,

Megginson and Netter (2001, p. 334) note that in their empirics, Ehrlich et al. (1994) find that partial change from state to private ownership has little effect on long-run productivity growth and that the benefits are based on complete privatization of the firm.

3. Theoretical framework

The analysis is split to two parts. The first part is focused on defining the pros and cons of privatizing predetermined state-owned companies, and the pros and cons of different privatization methods to the owner (state) and to the company to be privatized. The second part is focused on optimization process of the company and market value calculation with optimal time span for privatization. The different privatization methods considered are initial public offering (IPO), sale to strategic investor and sale of minority ownership of the company. The data are collected from two state-owned companies that are potential for privatization: AS EVR Cargo and AS Eesti Post.

AS EVR Cargo is the biggest and the oldest existing railway transport

company in Estonia, established by the demerger of Estonian Railways Ltd (AS Eesti Raudtee), whose history dates back 140 years. Main activities of the company are organizing cargo railway transportation on Estonian railway, whereas 62% of the capacity is transit products including oil and chemicals. The main customers are forwarders, transit operators and various production companies. The full owner of the shares of AS EVR Cargo is the Republic of Estonia. The company serves its

customers in Estonia on a 1219-kilometre long railway as well as over the entire 1520-millimeter gauge railway network, stretching from Finland to the Black Sea and from the Baltic States to the coast of the Sea of Japan, covering all CIS member-states. The company owns 75 locomotives and nearly 3100 rail cars. Revenues of 2015 were €64602 thousand that were 12.6% less than in 2014. Costs decreased 7% in 2015 compared to 2014 to €66216 thousand. EBITDA decreased 45% in 2015

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compared to 2014 to €5917 thousand, and the net loss in 2015 reached €1614

thousand, whereas net profit in 2014 was €2688 (AS EVR Cargo website, 05.04.16). AS Eesti Post is the leader of e-commerce and plays an important role in advancing the economic life of Baltic States. AS Eesti Post is an international corporation that provides postal, logistics and information logistics services. The group of AS Eesti Post includes Eesti Post Ltd as a dominant company and Payment Centre Estonia Ltd, Omniva UAB in Lithuania and Omniva SIA in Latvia as

subsidiaries. AS Eesti Post leads the parcel terminal market of Estonia, Latvia and Lithuania and employs about 2500 employees throughout the Baltic States. AS Eesti Post is a state-owned company that belongs to administration of the Ministry of Economic Affairs and Communications. AS Eesti Post is a growing company that has successfully adapted to the changing environment, earns considerable net profit and is capable of paying dividends. Despite the decrease of the demand of postal services, the revenue has increased over past six years. Total revenues of 2014 were €59.9 million and net profit €1.4 million. Recent biggest investments have been done in the developments of logistics and logistics information services, parcel machine business and geographical expansion in Baltic States (AS Eesti Post website, 05.04.16).

3.1 Methods and methodology

In order to find the results to the research question and the sub-questions, qualitative research is undertaken with semi-structured interviews. The interviews will be made with companies’ CEOs, CFOs and the high officials of the Ministry. Moreover, in order to get more insights into the well being of the companies to be privatized, attractiveness of the companies to investors and the pros and cons defined by the employees of the Ministry of Economic Affairs and Communication, existing documents will be reviewed and analyzed. In order to define the optimal selling price and the right timing of the sale, annual accounting reports will be analyzed. The market value of the company is calculated by using discounted cash flow method and multiples method.

According to Saunders, Lewis and Thornhill (2009, p. 509), the most efficient way of analyzing qualitative data are by coding. There are three types of coding that should be completed in the following order: open coding, axial coding, and selective coding (Saunders, Lewis and Thornhill, 2009, p. 510). Open coding is a

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disaggregation of data into units. Axial coding refers to the process of looking for relationships between the categories of data that have emerged from open coding. And selective coding is intended to identify the core category, around which the grounded theory will be developed (Saunders, Lewis and Thornhill, 2009, p. 511).

Since the goal is to develop a theory based on the collected data, an inductive approach is adopted. Even though an inductive approach requires the researcher to be open-minded and to start the research with data collection, followed by theory

development, the literature study beforehand is crucial.

Since the aim of the research is to predict and explain the behavior, while the emphasis being upon developing and building theory, the most suitable research strategy for satisfying those needs would be the use of a grounded theory (Saunders, Lewis and Thornhill, 2009, p. 148). Grounded theory strategy is used to build an explanation or to generate a theory around the core or central theme that emerges from the data.

Most of the data are collected through semi-structured interviews. The use of semi-structured interview technique gives the freedom in changing the order of the questions depending on the flow of the conversation, or asking some additional questions to get more insights and explore the topic more in-depth. The interview data will be recorded by auto-recording the conversation by the consent with the

interviewee and in addition by note taking. Note taking allows making additional remarks during the interview.

When undertaking semi-structured interviews, several quality issues should be taken into account (Saunders, Lewis and Thornhill, 2009, p. 326). First of all,

reliability that is concerned with whether the same item measures the same thing across similar respondents will be considered. In order to increase the reliability, interviewer bias has to be minimized. To decrease interviewer bias, the tone and nonverbal behavior of interviewers have to be consistent to avoid that the answer of an interviewee would be somehow affected by interviewers actions. The other option of increasing the reliability is to ask a number of questions about the same

phenomena. Another quality issue that is also necessary to take into account is a response bias. Response bias occurs when the interviewee is participating, but is not fully open in answering to the questions. Since, the outcome of the research represents the opinion of the owner (state), it is in best interests of interviewees to provide all the information. Finally, another concern about the quality of the research is its

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generalizability – whether the results of the research are applicable to other similar organizations as well. Due to its specific nature of the research, different strategic aims of the companies, and the differences in relationships between each state-owned company and government, the results would not be generalizable. In order to increase external validity, questions will be clarified, responses probed and several questions will be asked about the same phenomena.

The informal and formal meetings between Minister of Economic Affairs, Directors of the Departments, Analytics, and the management teams of the companies will be recorded by note-taking. Since both parties are interested in privatizing the companies, it can be assumed that the information shared is relatively valid and with high reliability.

In order to find the market value, discounted cash flow method and multiples method will be used. Discounted cash flow method is used to discount the projected free cash flows to today’s value. For finding today’s value, projected free cash flows are divided by the weighted average of the cost of capital, and the terminal value will be added (with the proposed annual growth rate of 2% for AS Eesti Post, and 0% growth rate for AS EVR Cargo). The management teams of AS Eesti Post and AS EVR Cargo create the projected free cash flows for the upcoming 5 years, the Ministry of Finance calculates return on equity, and the return on debt is calculated with the information found on the annual report. For the multiples method, the information is gathered from yahoo.finance.com about the similar companies as AS Eesti Post and AS EVR Cargo. Those companies for AS Eesti Post are FEDEX, DHL and UPS. Companies similar to AS EVR Cargo are VTG Aktiengesellschaft, Norfolk Southern Corp, and Genesee & Wyoming Inc. The average of those comparable three companies’ P/E, EV/EBITDA and P/B is calculated for both transportation industry and parcel logistics industry, and compared with the financial reports of AS Eesti Post and AS EVR Cargo.

4. Results AS Eesti Post

4.1 Description of the situation (the purpose of privatization)

AS Eesti Post’s biggest strength and main competitive advantage in Estonia is a distribution network spread across the country and its operating knowledge. It is very

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complicated and expensive for the competitors to develop such network (AS Eesti Post development perspective). The main challenges for the company within the strategic period of 2016-2020 are: restructuring the distribution network for satisfying the growing parcel business; secondly, optimization of the labor costs by improving automatization processes; thirdly, prioritizing the investments in the growth

opportunities; and finally, achieving the growth objectives on Latvian and Lithuanian market, where AS Eesti Post lacks the competitive advantage that comes from a strong distribution network. Based on the strategy map 2016-2020, AS Eesti Post’s main business is logistics (parcel and post businesses, distribution centers and payment center); the supporting business is information logistics (invoice and

document administration). In the logistics business, AS Eesti Post aims to become the leading logistics company in the Baltic States. Based on the strategy, revenues would mainly increase by growth of parcel business, while post business is expected to decrease. In the information business, AS Eesti Post aims to become the market leader and the role model of paperless invoice and document administration solutions. AS Eesti Post’s additional competitive advantage is its capability of providing full package solutions for invoice and document administration. The goal is to win the 40% of market share in information logistics business by 2020. The assumptions of the growth are efficiency product development and successful expansion on Latvian and Lithuanian markets (AS Eesti Post development perspectives).

For achieving the strategic objectives, required investments are around €25 million in the period of 2016-2020. The larger part goes to logistics business: investments into a new logistics center and to sorting conveyer, investments in the stationary parcel machines, and investment into technological solutions. Main investments in information logistics business go to product development, and to expansion on other Baltic States (AS Eesti Post development perspectives). While it is projected that AS Eesti Post is capable of financing its investments from the cash flows, an alternative option would be raising external funds. One of the possible destinations for expansion is Finland, and in order to succeed on the Finnish market, additional financing is required (Mario Lambing, 14.04.16). The Finnish market is significantly larger than the Latvian and Lithuanian market and requires financing on the different level (Mario Lambing, 14.04.16).

Since AS Eesti Post is competing on the free market and its main goal is profit maximization, one of the options of raising external funds is the privatization of the

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company (expectations of the state to AS Eesti Post). Moreover, the Ministry of Economic Affairs is also interested in privatizing the company to stimulate the free market and to reduce the government costs of managing state-owned companies (Mario Lambing, 14.04.16). Three options of privatizing the company are initial public offering, majority share privatization and minority share privatization. Each option has its strengths and weaknesses that need to be analyzed before privatization in order to make the most optimal decision. Also, the company has to be optimized by restructuration for increasing the attractiveness of the company to investors and to maximize the market value. Moreover, the company should be privatized in the time span where the market conditions are the most favorable for successful and profitable transaction. Following is the analysis of different privatization scenarios, overview of the necessary optimization process, market value calculation and the assessment of the most favorable privatization moment, overview of the potential investors and the market review. The report will be concluded with the risk assessment and potential opportunities of reducing those risks.

4.2 General outcomes of privatization of AS Eesti Post

The general positive outcomes of privatization of AS Eesti Post are following. The ultimate goal of the company on private hands is the profit maximization, so the privatization shifts the focus of AS Eesti Post from social welfare maximization to cost-efficient choices. Most likely the privatized company becomes more competitive and sustainable in the long run. Privatization increases the financial strength of the company that allows it to expand to the other markets. Due to the decreased political management, AS Eesti Post becomes less dependent on the state. Arguably, private ownership increases the pace of implementing laws that stimulate the efficiency of the industry, as well as, increases flexibility in decision-making. Growth of economic efficiency is also entailed by increased role and quality of the directors of the board of the company. In addition, increased competence of the directors of the board to monitor strategic principles and management decisions enables AS Eesti Post to be more efficient.

The general negative outcomes of privatization of AS Eesti Post are following. As stated by the Economic Development Department Head Analyst Mario Lambing

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(14.04.16): “Since, AS Eesti Post has a symbolic importance, privatization would harm the reputation of the state and popularity of the Minister of Economic Affairs”. In order to increase the efficiency, many employees need to be laid off; therefore, the privatization of the company increases unemployment in the industry. When the company goes to the private hands, state would have toughened partner, because the negotiations about the social welfare maximization would more complicated (Mario Lambing, 11.04.16). As the advisor of communications department Elena Reilent (11.04.16) stated, “If the level of convenience of the universal postal service is reduced, there is a threat to the community life at the countryside”. Since, private owner is less willing to deliver the post to the households in the less populated areas where the costs are higher than revenues, privatization of AS Eesti Post would reduce the level of convenience of universal postal service for many citizens (Elena Reilent, 11.04.16). Also, the ownership transfer leads to disappearance of the annual dividends and removes the opportunity for the state to balance its budget.

4.3 Pros and cons of initial public offering

The positive outcomes of AS Eesti Post’s initial public offering are following. IPO increases the information sharing due to stock exchange regulations, and allows wider ownership. According to Mario Lambing (11.04.16), IPO leads to increased liquidity of the capital market and heats up the Tallinn stock exchange. In addition, minority share privatization through IPO allows the state to maintain the control over the company, and partial privatization through IPO puts the pressure on the state to make faster and more efficient decisions such as implementation of laws and regulations. Moreover, IPO is politically more popular and acceptable than alternative

privatization methods.

The negative outcomes of AS Eesti Post’s initial public offering are following. Creating required flexibility, clarity and transparency is extremely costly. IPO

requires restructuring the company, which brings additional investments and take time. Also, it is difficult to set the stock price – in order to earn the public acceptance, the initial stock price will most likely be set low, however, it means that the expected revenue will not be earned. Moreover, diffused ownership caused by IPO does not ensure that the company will be managed more efficiently than it is while owned by the state. IPO shifts the focus on the stock price and short-term gains rather than

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long-term strategic objectives. Moreover, the CEO of AS Eesti Post, Aavo Kärmas

(13.05.2016) stated: “Creating, global parcel logistics companies are not interested in investing in the company through stock exchange”. If IPO would be a step between the majority share privatization, then it is questionable what is the benefit of IPO (Aavo Kärmas, 13.05.2016). Finally, when the company is on the stock exchange, there should be a main investor that manages the objectives of the company, and it should be someone else than the state.

4.4 Pros and cons of privatization to strategic investor (majority share privatization)

The positive outcomes of privatizing AS Eesti Post to strategic investor are following. Privatization enables the state to raise the revenue. There will be synergy created when the company is merged with the investor’s company by sharing activities and transferring skills, as well as, new investments will be made to the company by new investor. Privatization gives access to new markets and to wider market share. Moreover, privatization helps to improve the industry conditions thus entailing GDP increase and reduced costs for the state. In addition, privatization to strategic investor allows the state to delegate tasks of social welfare maximization to the new owner through contract negotiation.

The negative outcomes of privatizing AS Eesti Post to strategic investor are following. Privatization to strategic investor has a weaker transparency of the sales transaction compared to IPO. There would be strong public contradiction when the state-owned company is privatized to foreign investor. Moreover, the state would have weaker position in delegating the social welfare maximization tasks to the company. Privatization of majority share also makes the state to loose the strategic control over the company. There is also a risk that the competitor to satisfy niche role will acquire AS Eesti Post and international growth potential of the company would not be realized (Mario Lambing, 11.04.16).

4.5 Minority share privatization

The positive outcomes of minority share privatization of AS Eesti Post are following. The management of the company is more based on the free market rules and the focus

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is on profit maximization compared to full state ownership (Mario Lambing, 11.04.16). Sharing activities and transferring skills will create synergies if AS Eesti Post will be merged with investor’s company. Minority share privatization would also give access to new markets and new customers, which help balancing costs, increase the efficiency and improve the competitive position.

The negative outcomes of minority share privatization of AS Eesti Post are following. The company would be less attractive for the investors when the control would not be transferred, since acquiring the control is the main motivator to buy the company and to pay the premium. Due to not receiving the control over the company, the transaction price would be significantly lower, and due to not receiving the

control, investors are less able to increase the efficiency and profitability of the firm. Minority share privatization also leads to longer and lower quality privatization process.

4.6 AS Eesti Post sales process (preparation for the sale)

AS Eesti Post has invested on Latvian and Lithuanian markets and to several e-services, where the projects have not become profitable yet. Achieving the profit objectives highly depends on the success of those projects (AS Eesti Post

development perspectives).

Enterprise value influencing factors are mainly related to universal postal service (UPT). Providing UPT with the current regulations is loss-making, and the losses are covered with other profitable businesses of AS Eesti Post. Lack of clarity related to the future of UPT and its regulations is reducing the market value of the company, in order to increase the value and decrease the loss, the regulations have to be changed (AS Eesti Post development perspectives).

In logistics business, it is necessary to increase the volume of transported goods. In international parcel business, international transported goods volume is required (in partnership with other logistics companies or postal organizations, or alliances with e-commerce companies). One of the alternatives to increase the transported goods volume is the strategic alliance with logistics companies who could forward their packages to Baltic market via AS Eesti Post (AS Eesti Post development

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Both, the company and the Ministry of Economic Affairs are interested in privatizing AS Eesti Post as soon as possible. There are many new entries in the region by international competitors, which are building their distribution networks. Moreover, when the preparation process for privatization takes too long, international competitors may already have created their distribution network in Baltic region and there would be no investors for AS Eesti Post anymore (Aavo Kärmas, 13.05.16). In addition, entries by international competitors are a huge threat to AS Eesti Post’s future, since heavy competition may reduce the competitiveness of the company. Unfortunately, the fact that the laws and regulations have not been implemented that would allow optimizing universal postal service (UPT), it is almost impossible to privatize the company in the current state. Universal postal service makes loss, which is balanced out with the cash flows of other AS Eesti Post’s businesses.

Implementation of new universal postal service (UPT) laws and regulations would allow to optimize the service in the way that the post would not delivered to the households but to the nearest town halls or to the other institution where the post collection service would be integrated (supermarkets, kiosks, etc.). This regulation that brings efficiency and decreases costs is politically very unpopular and it is unlikely that the government coalition would implement that law. Implementation of the law and regulation that would allow optimizing universal post service would mean that leading political party would loose its popularity and the Minister of Economic Affairs may resign from his position. Moreover, implementation of the law would take at least two years. Nevertheless, it is argued that it is impossible to make the company attractive enough for the investors to earn good revenue from the sale with the current universal postal service regulation (Mario Lambing, 11.04.16).

According to Aavo Kärmas (13.05.16): “Universal postal service regulations must be changed before AS Eesti Post is privatized, because it would give a clear overview for the investor about the company”. Current situation for the investor is unclear, and rising costs may occur in near future. Investor has to have a clear

understanding that within two to three years, the regulation has been changed and it is possible to manage the company efficiently and profitably. The risk has to be

removed that costs related to universal postal service will increase and the risk that the state may interfere (Mario Lambing, 11.04.16). Right now, it is complicated to privatize the company due to smaller interest by investors and the smaller amount of money the investor is willing to pay.

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4.7 Market value of the company and suitable time span for sale

4.7.1 Discounted cash flow method

As stated before, equity, debt, cash, interest bearing debt, and return on debt are collected from AS Eesti Post’s annual accounting report. Return on equity is collected from the document created by the Ministry of Finance, and the growth rate is general estimation from the finance book. When substituting all the numbers to the WACC formula, the discount rate, as seen in table 1, would be 8.194% that is approximately what was expected. Since, AS Eesti Post is competing on relatively low-risk market and there are high growth potentials, the discount rate 8.194% seems to be accurate. Before discounting the projected cash flows, the terminal value of €190 233 129 is calculated if the growth rate is assumed to be 2%. Terminal value represents the market value of the future free cash flows when the stable growth rate is expected to go on forever. When the cash flows and terminal value are discounted, the market value (equity value) of AS Eesti Post can be found, which is €150 587 440, as seen in table 1. Even though the growth potential is high, the book value of equity is €30 168 000, so the calculated market value seems to be rather high.

Table 1: Market value of AS Eesti Post based on discounted cash flow method Eesti

Post (DCF)

re rd Equity Debt Cash Interes

t bearing debt Grow th rate 8.4% (riigiosalus ega äriühingute koondaruan ne 2014) 2.3% (annual report 2014, p. 35) € 3016800 0 € 2662000 0 € 943200 0 € 105500 0 2.00 %

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WACC = re [E/(E + interest bearing debt)] + rd [(interest bearing debt)/(E + interest bearing debt)] WACC = 0.084 [30168000/(30168000 + 1055000)] + 0.023 [(1055000)/(30168000 + 1055000)] = 8.194% Projected free cash flows 2016 €9028000 2017 € 8986000 2018 € 9964000 2019 €10663000 2020 €11552000

Terminal value = [FCF5 x (1 + growth rate)]/(re – growth rate)

Terminal value = [11552 x (1 + 0.02)]/(0.08194 - 0.02) = €190 233 129

FCF0 = (FCF1/WACC) + (FCF2/WACC^2) + (FCF3/WACC^3) + (FCF4/WACC^4) + [(FCF5 + Terminal value)/ WACC^5]

FCF0 = (9028000/1.08194) + (8986000/1.08194^2) + (9964000/1.08194^3) + (10663000/1.08194^4) + [(11552000 + 190233129)/1.08194^5] = €167 775 436

Equity value = FCF0 - (debt - cash)

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4.7.2 Multiples method

For multiples method there are three different types of market value calculations done. The types are P/E, EV/EBITDA and P/B, as seen in table 2. Those values are collected on those companies’ accounting reports and averaged out. It can be said that industry values of P/B and EV/EBITDA were all quite the same. However there was higher deviation in P/E values, so the average was quite high. When the average was calculated the additional calculations were done to find the market values of different method types, as seen in table 2. It can be assumed that P/E method’s result of €102 087 810 and P/B method’s result of €91 620 216 are more accurate than EV/EBITDA method’s result of €40 095 660.

Table 2: Market value of AS Eesti Post based on multiples method

P/E EV/EBITDA P/B FEDEX 42.88 7.01 3.07 DHL 20.99 10.57 3.03 UPS 19.73 10.56 3.01 Average = 27.87 Average = 9.38 Average = 3.037 Multiples EV = (P/E) x net income EV = [(EV/EBITDA) x EBITDA] - (debt + cash) EV = (P/B) x book value of equity Equity value €102 087 810 €40 095 660 €91 620 216

4.7.3 Suitable time span for sale

Based on the free cash flow projections, the AS Eesti Post is in a suitable economic state for privatization. The only aspect that is keeping back the privatization is the

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current postal law and its regulations that require the company to provide the universal postal service in an inefficient way. As soon as the new law will be implemented, the company could be profitably privatized. Taken into account the pace of new entries and the activity level of competitors, government should hurry up with the privatization process. Therefore, the assumption for successful privatization is that the process of implementing the postal service law goes hand in hand with the process of finding potential investors (Mario Lambing, 14.04).

4.8 Market overview and industry analysis

4.8.1 Michael Porter’s five forces model Rivalry

Due to the globalization, and the growth of e-commerce and online shopping the competition is becoming more intense. New global competitors are entering the market and intensifying the competition, while existing competitors are making additional investments in their companies to improve the quality of the service and increase the reach of customers. Increasing competition can be prevented when existing companies make use of collaborating and alliance making with international logistics companies and online shopping sites.

New entries

Even though the barriers for entry are relatively high, since the investments to be made are high. However, the global parcel businesses have the money and

competence to expand their services to Estonian market, and to do that quite quickly.

Buyer power

There is a strong buyer power. Since there are many companies offering the similar service, customers can easily choose the company providing the service on the lowest price.

Supplier power

Since most of the companies on the market have developed their own network, have their own vehicles and systems, and do very little outsourcing, the supplier power is

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weak or non-existence. Companies in the industry can fully perform without suppliers.

Substitutes

The substitutes for newspaper and letter delivery are the usage of online options. There is a huge threat for the universal postal service that less people are using the service and the costs are becoming higher and higher compared to the revenues. As long as the law does not change, the loss caused by universal postal service business is increasing. However, since the e-commerce business is increasing, there is no direct substitution for getting your Nike shoes delivered from Amazon to the existing parcel logistics business.

4.8.2 PESTEL Political

Estonia has a stable government lead by a center right reform party with transparent governance and business friendly market regulations. There is political consensus that the companies that could well perform on the free market on the private hands should be privatized. The Minister of Economic Affairs and Communication has himself made a public statement that the privatization process of AS Eesti Post will start soon.

Economic

Since the privatization of AS Eesti Post entails additional revenue increase for the state, the GDP would also increase. The additional money could be invested in the infrastructure that improves public welfare. Also, when the privatization is successful, and the new owner manages to create the synergies, there could be additional positive effect on the GDP. However, Estonia is also facing a decreasing labor supply as young people emigrate to Scandinavia or Western Europe due to the low average salaries. In addition, the demographic situation in Estonia and urbanization brings up the problem of finding competent workforce, which threatens the sustainability of efficient postal distribution network. On the other hand, increasing importance of information technology capability in company’s services and processes creates the situation where it is difficult to find competent employees for the development team.

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Socio-Cultural

There are no significant socio-cultural aspects that affect the privatization of AS Eesti Post.

Technological

Estonia has a highly developed telecommunications and IT infrastructure- e

residency, e-elections, e-school, online tax returns and so on. 95% of the households are connected to Internet and there are 1010 public internet hotspots across the

country. The high level of IT is also transferred to parcel logistics business, where AS Eesti Post for example has digitalized most of its operations. Growth opportunities arise mainly through access to new technological innovations that increase business processes’ efficiency and enable automatization. This allows AS Eesti Post to offer higher quality services that creates the fundament for competitive advantage on foreign markets. However, this also leads to increase of cyber risks.

Environmental

Estonia, due to its Northern location by the Baltic Sea, has sea climate and dramatic peaks between the summer and winter. It makes the deliveries to the country-side much more complicated during the winter when the temperature may be up to -30C and snow level is high, while during the summer it may be up to 30C. There are additional maintenance costs related to operating the machinery and vehicles used for delivering the mail and post.

Legal

The universal postal service regulation that makes it mandatory for AS Eesti Post to deliver post 6 days a week to all the household around Estonia, makes it difficult for the company to show good financial results. The universal postal service is making loss and does not allow the company to increase efficiency. There are negotiations in the government about whether to change the law or not. If the law will be changed, the company would not have the obligation to deliver to the households anymore, but to the nearest village centres. This would allow AS Eesti Post to cut the costs, and would also make the company more attractive for investors.

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4.9 Analyzing the risks of privatizing AS Eesti Post

There are several risks involved with the privatization. Firstly, there is a high risk for reputation (Elena Reilent, 11.04.16). Public opinion is that the sale of the company with symbolic meaning equals the sale of part of the nation. In order to reduce the risk, strong PR campaign should be done about how the postal service can be

improved if loss-making activities will be removed, and new investments can be made with the invested funds. It is advisable to develop a plan of investments in the society and to present it to the public to gain more support for the privatization. Also, the option for reducing the risk on reputation is choosing IPO as the privatization method that would give the public an opportunity to acquire a position in the national

company.

Secondly, there is a risk that the disputes against the state will be made by the private owner (Mario Lambing, 11.04.16). It is likely to happen when the investor is not willing to pay the costs caused by the state, such as managing the loss-making universal postal service. In order to reduce the risk of disputes, state should be set in the contract what are the social welfare maximization tasks the company has to follow.

Thirdly, there is a risk that private owner is not managing the company efficiently – lack of investments in the postal distribution network and lack of focus on social objective (Mario Lambing, 11.04.16). In order to reduce that risk, the state should set an option to buy back the shares. However, it reduces the attractiveness of the company for the investors and the sales price, as well as, it does not guarantee that the state would have the available funds to buy back the shares.

5. Results AS EVR Cargo

5.1 Description of the situation (the purpose of privatization)

Biggest influences for AS EVR Cargo to reach its strategic goals and to meet the economic and financial budgets are transportation volume, transportation rates, infrastructure usage rates, and income from railcar rent, fuel rate, labor costs and investments. In order to reach the strategic goals of 2014-2017, the company aims to raise external funds. Moreover, the factors that negatively influence transportation

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volume in Estonia have increased, such as more strict Russian transportation policies, decreased throughput on Russian boarder, political discountenance and increased railway infrastructure rates. In order to successfully manage the company, raising external funds is crucial (AS EVR Cargo business plan 2014-2017).

Since AS EVR Cargo is competing on the free market and its main goal is profit maximization, one of the options of raising external funds is the privatization of the company (expectations of the state to AS EVR Cargo). Moreover, as the deputy secretary general for Transport, Ahti Kuningas (22.04.15) stated, “The Ministry of Economic Affairs is also interested in privatizing the company to stimulate the free market and to reduce the inefficiencies of the transportation sector caused by high fixed costs and reduced transportation volumes”. While the transportation volumes have decreased from 45 million tonnes of goods to 15 million tonnes within 10 years, the capacity of the railway industry has stayed the same (Ahti Kuningas, 22.04.16). In order to save one of the most profitable traditional economic industries, the industry has to be improved and inefficiencies removed by changing the ownership structure. Three options of privatizing the company are initial public offering, majority share privatization and minority share privatization. Each option have its strengths and weaknesses that need to be analyzed before privatization in order to make the most optimal decision. Also, the company has to be optimized by restructuration for increasing the attractiveness of the company to investors and to maximize the market value. Moreover, the company should be privatized in the time span where the market conditions are the most favorable for successful and profitable transaction. Following is the analysis of different privatization scenarios, overview of the necessary

optimization process, market value calculation and the assessment of the most favorable privatization moment, overview of the potential investors and the market review. The report will be concluded with the risk assessment and potential

opportunities of reducing those risks.

5.2 General outcomes of privatization of AS EVR Cargo

The general positive outcomes of privatizing AS EVR Cargo are following.

Privatization of AS EVR Cargo is likely to increase the efficiency of railway industry, as well as, it reduces fixed costs of the industry (Regina Raukas, 28.05.16). As stated

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by the CEO of AS EVR Cargo, Raul Toomsalu (31.05.16): “Privatization increases the competitiveness of Estonian railway cargo industry by correcting the market – no competition between privately owned and state-owned company leads the focus on increasing the volume of goods on the market”. There is an opportunity for the state to improve the relationship with the Russia, if the company is not directly related to the state (Regina Raukas, 28.05.16). Moreover, the state representatives would have a chance to improve the relationships with the entrepreneurs that are active in the industries affected by the well being of AS EVR Cargo. Also, there is potential for GDP growth, since the focus of the company under the private-ownership is profit maximization and when such large company is doing well, the economy of the state is also better off. Moreover, decreased dependence on the state and decreased political management of AS EVR Cargo increases the flexibility in decision-making and increased economic efficiency. Also, privatization leads to increased role and quality of the board of the directors of the company, and increases the competence of the board of directors to monitor strategic principles and management decisions.

The general negative outcomes of privatizing AS EVR Cargo are following. Privatization of AS EVR Cargo increases the unemployment in the industry due to the fact that private owner is likely to lay off employees for increasing efficiency. Due to the more complicated negotiations for the state with the new owner about the social welfare maximization, the state has toughened partner. Moreover, the privatization of AS EVR Cargo to the only competitor on the market may cause the disappearance of the competition – disappearance of the competition can lead to the increase in the service price and decrease in service quality (Regina Raukas, 28.05.16). Also,

disappearance of annual dividends leads to the situation where there is no opportunity for the state to balance its budget. There can also be a threat of discrimination of small businesses when the private owners that are not interested in transporting old metal and wood on the railway control AS EVR Cargo (Ahti Kuningas, 22.04.16).

5.3 Pros and cons of initial public offering

The positive outcomes of AS EVR Cargo’s IPO are following. IPO increases transparency, flexibility, and information sharing of the company due to the stock exchange regulations. Privatization of AS EVR Cargo by IPO heats up the Tallinn stock exchange and increases the liquidity of capital markets. Moreover, minority

Pros and cons of privatizing Estonian state-owned companies AS Eesti Post and AS EVR Cargo