Focus on mixed-ownership reform

Focus on mixed-ownership reform is the second white paper published by Deloitte SOE Transformation Initiative Project Management Office. It interprets policies, analyses cases and elaborates practical cases and essentials in operation including:

• policy interpretation
• SOE classification and mixed ownership reform

• the target participants and investors

• five approaches to realize mixed-ownership : restructuring, IPO, employee share-ownership, fund, and introduction of strategic investor; and

• mechanism change in mixed ownership enterprise : corporate governance, talent system, daily supervision

2015 will witness the full start of the SOE (state-owned enterprises) reform. This round of reform is fundamentally to strengthen the state-owned economy's overall "vitality, influence, and control" and to serve the national economy and the people's livelihood as well as the state strategies, against the backdrop of Chinese economy's "new normal" era and diversifying thoughts and interests in the society. The reform is basically targeted to stimulate the vitality and competitiveness of SOEs.

One feature of this round of reform is to monitor SOEs in classifications. The mixed ownership reform will be first implemented in those SOEs classified as in fully competitive categories and sectors. There are no unified criteria or process for SOEs to select partners to conduct mixed ownership reform, as every SOE is unique. The top priority of SOEs is to analyze its business status and long-term strategic needs -- more capital for growth, more management experience to enhance governance, or more capabilities for expanding to the upstream and downstream of industry chain. Then SOEs screen partners of mixed ownership with clear direction and objectives based on the analysis.  

There are five approaches to realize mixed ownership mentioned in the reform documents released by provinces and municipalities: open transformation and restructuring; IPO as a whole or IPO of core assets; Employee Stock Ownership Plan (ESOP); introducing fund and introducing strategic investors. And the five approaches are often used in combination, with different focuses at SOEs' different development stages. For the SOEs in trouble, open restructuring, by re-alignment of business, assets and liabilities, enables SOEs to regain investors/capital market; while introducing strategic investors, external investors usually require the implementation of ESOP, to ensure long-term motivation of management and core talents as well as alignment of the interests of individual employees and the enterprises; introduction of funds can solve various fund needs in the process of SOE reform; IPO as a whole or IPO of core assets, is one of ways for strategic investors and funds to exit, and the completion the incentive process for employees holding shares.

Mixed ownership enterprises need to break down barriers for development, including the establishment of effectively-balanced and equally-protecting legal person governance structure, market-oriented talent mechanism, long-term incentive mechanism, and effective daily supervision system of mixed ownership enterprises, to explore successful experience of SOE reform.

Task lists for SOEs and private enterprises to consider about mixed ownership reform are listed at the end of this article. With the case analysis, practical operation procedures and focuses for attention, this white paper aims to offer SOEs, private enterprises and foreign enterprises a consolidated solution of mixed ownership reform.