Hungarian State Holding Company:Governance of state ownership

1. Hungarian State Holding Company:Governance of state ownership

2. Presentation to the High Level Meeting of the State Ownership Authorities Csaba Polacsek Dr. Deputy CEO, Head of Corporate Portfolio Hungarian State Holding Company (HSHC) 5September 2011

3. Executive summary • State ownership plays an important role in the Hungarian economy. The state-owned companies have a significant effect on GDP. • State ownership is a significant tool to execute government public policies. • In smaller states ownership position is of utmost importance compared to large states to control market mechanisms and pricing failures. • Privatisation phase is over after the socialist regime. • Bad governance practices (ie: corruption) of state owned assets were in the limelight: focusing on good governance. • Applying private equity best practices is a must when it comes to state-owned asset management. • Asset management – and within this the regulation of state assets and supervision of their ownership – falls within the Ministry of National Development’s remit. • Expanding business-oriented thinking • HSHC should improve the reputation of state-ownership. STATE CAN BE A RESPONSIBLE OWNER!

4. Ownership entities of state owned enterprises Exercisingstate ownership rights - 3 different ownership entities remained Hungarian State Holding Company Entities declared by other law National Development Bank • Majority owned Companies in different sectors e.g. energy, postal, lottery, transportation etc. • Several minority shareholdings, including listed companies • Mainly financial or financial related companies • Other specific sectoral areas – e.g. forestry and infrastructure • Specific and large companies • their ownership entities are mainly ministries 4

5. National asset management framework:establishing HSHC Hungarian State Holding Company: moving towards the centralized model. Hungarian Privatization and State Holding Treasury Property Directorate National Land Fund Management • Former holding and privatization company • Company limited by shares • It managed state owned real estates • Budget institution • It managed state owned lands. Centralized ownership model Hungarian State Holding Company (HSHC) • Company limited by shares under Hungarian Company act • non-distributable shares 5

6. Facts and figures of state ownership • The functioning companies have a total balance sheet of €10.4 billion in proportion to HSHC ownership. • Total book equity value of majority owned HSHC SOE portfolio is € 5.6 bn • Not homogenous portfolio • HSHC has the right to deal with inherited companies • HSHC liquidates companies that have no future perspective COMPAN I ES REAL ESTATES • 14% of the state real estates is directly managed by HSHC (Total real estate value is € 31 billion).

7. SOE assets at HSHC Major enterprises at HSHC Top Transportation Electricity Utilities Culture Agribusiness Manufacturing Environmental Sport

8. Hungarian state owned asset management: international comparison SOE sector is a significant employer. Accepted and applied international asset management best practices. Continuous development of national asset management practices. Centralised asset policy at ministry level with more ownership exercising institutions. SOE employees as % of total employment in 2010 Source: OECD 8

9. Adequacy of state ownership policy • Deciding what level of state ownership is adequate should be part of the national strategic thinking. • Regarding contolling market failures in smaller states, the ownership position is more important than regulatory position. • Via ownership position the policy makers will have better access to market information and ‘drivers’ of pricing. • The so called ‘spontaneous privatisation’ (without any strategic consideration) is one of the biggest problem in Hungary. • Foreign background multinational companies chanelled out their profit from Hungary (low profit reinvestment level) • Keeping the natural monopolies (water supply, electricity, gas supply) with state-controlled ownership would have been important. • Delivering quality public services is easier when the state has a strong ownership position.

10. Commercial and non-commercial objectives • Commercial and non-commercial activities are divided and accounted separately • Non-commercial public benefit activites must be in line with the company’s articles of association • Subsidies comply with state-aid regulation • Nonprofit business associations may engage in business operations only in the form of ancillary activities • The State Aid Monitoring Office has the task to ensure that state aid in Hungary is granted in accordance with EU regulation • Strict policies to avoid overcompensation of non-commercial activities

11. Asset management strategy Back to basics: defining the asset management strategy • Instead of administrative management the focus is to create the framework for business-oriented asset management. • Goals to fulfil during asset management: effectiveness, having economic value added decisions, being cost sensitive • Main focus is to reinforce accountability and corporate governance • Strategic thinking at operational level is a neccesity • Before having a comprehensive strategy there were alarming tasks to do: • Due diligence of companies • Replacing managements at SOEs where neccesary • Understanding contractual frameworks of SOEs (especially long-term commitments)

12. Strategy and operation Layers of SOE strategic thinking Strategy Operation Principles of decision-making Portfolio-levelrecommendations Executingtheindividualstrategy

13. Critical strategic points Strategic points Target Individual companystrategies • Strategy is a basic document • Strategy is based on the business model of the company Business-oriented approach • Mining out possibilities • How to find solutions Risk management • Risk map • Risk management system Corporate governance • Broadcorporategovernancerecommendations • Roles and responsibilities of management

14. First steps before building up the strategy

15. Cleaning up the portfolio Selling minority stocks is in the pipeline: 50 minority stock to be sold until the end of 2011

16. Be the first to know: recalibrating corporate controlling CEO of HSHC HSHC ControllingDepartment Head of corporateportfolio HSHC SupervisoryDepartment HSHC portfoliomanager Supervisory Board (peremptory) Auditor Internal audit Management

17. Governance and company monitoring Recognising anomalies Transparent company operation for the owners Early-warning system Recognising operation that is not in line with goals Corporate Understandingoperation Monitoring System Accountability if plans cannot be executed properly Feedback Plans and execution

18. Central support for operation Joint procurements Portfolio-level regulations (investment regulation, renumeration policy, harmonizing accounting policies) Knowledge-base - Business plan guideline - Regular workshops and peer reviews Corporate governance best practices

19. Shared-service centers • Goals: • Streamlining businesses • Reducing overlapping activites and redundancies • Centered support services • Focusing on core competencies • Information an control over minor companies • Results: • - reduced OPEX • - reliable support services • - stronger controlling • - portfolio level net cost reduction

20. Organizational chart of HSHC Minister of National Development Supervisory Board Board of Directors Chief Executive Officer Deputy CEO of Corporate Portfolio Chief Legal Counsel CFO HR and Security General Deputy CEO of Real Estate Portfolio

21. Decision-making structures of SOEs Companies with BoD Companies without BoD HSHC HSHC Supervisory Board Supervisory Board Board of Directors Chief Executive Officer Chief Executive Officer HSHC Peremtory Supervisory Board Chief Executive Officer 21 21

22. Further steps to improve governance

23. Annex 1: Example of real estate management The Palace is one of the most important, largest monuments of Hungarian Palace architecture. Its builder, Count Antal Grassalkovich I (1694-1771) was a typical figure of the regrouping Hungarian aristocracy of the 18th century. He was a Royal Septemvir, president of the Hungarian Chamber, and confidant of Empress Maria Theresa (1740-1780). The construction began around 1733, under the direction of András Mayerhoffer (1690-1771) a Salzburg builder. In 2009 an enormous renovation project was launched in order to restore the major part of the building that will serve as the most important summit building during the Hungarian EU Presidency in 2011. 23

24. Annex 2: Example from the company portfolio #1 electricity power generator in Hungary #1 wholesale electricity trader in Hungary 99,9% owner of the Hungarian power grid company Total generation capacity: 2777 MW Miskolc63MW Lőrinci 170MW Sajószöged 120MW Vértes 240MW Hungarowind 23MW Észak-Buda50MW Márkushegy0.75mt Litér 120MW Paks 1,970MW Coal plant Nuclear power plant Heating plant Gas turbine plant Wind power Coal mine 24