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Privatization in France

Privatization During Jacques Chirac's Prime Ministership of 1986-88

In the French Assembly elections of March 1986 the Parti Socialiste lost the majority it had won in the elections of 1981. The number its seats in the Assembly dropped from 285 to 215, not as much of a collapse as was expected, but enough to lose control of the government to a coalition of Gaullist parties whose number of seats increased from 153 to 274. The prime ministership was offered to leader of the largest party in the coalition was Jacques Chirac. Jacques Chirac had been prime minister once before from 1974 to 1976.

Chirac accepted the position of Prime Minister, but the political situation in 1986 was quite different than his previous prime ministership. In 1974 the President was Valéry Giscard d'Estaing, a man of the same political persuasion as Chirac and a man whom Chirac was instrumental in electing. In 1986 the President was François Mitterand of the Parti Socialiste, a man whose philosophy of government was quite contrary to that of Chirac. Mitterand had supported an extensive nationalization propgram in an economy that was already substantially government-owned and operated.

The period of 1981 to 1986 under the Socialists had seen some successes, notably curbing inflation, but also a lot of failures, some due to socialist policies and some due to factors outside of their control. While the Socialists considered their program successful the prevailing mood was that the socialists program had been a failure and this led to their defeat in the legislative elections of March of 1986. Jacques Chirac as the head of the largeest political party in the Assembly was chosen as Prime Minister.

Jacques Chirac
Jacques Chirac came to the Prime Ministership with considerable administrative and political experience. As a person he is intelligent, politically astute and action-oriented. Although possessing personal charm he gives people the impression of being in a hurry, as evidenced by his nickname of Helicopter and Franç Mitterand remarked that Chirac speaks like a typewriter.

Although Chirac's roots were in a rural area of France his education was received in Paris and he trained at the prestigous École Nationale d'Administration (ÉNA) which is dominant training center for French government administrators.

After completion of his training at ÉNA he served in Directorate of Agriculture and Forests in Algiers, Algeria. He had the opportunity to join the General Secretariat which functioned within the office of the Prime Minister. His abilities came to the attention of then Prime Minister Georges Pompidou who made Chirac in 1967 Secretary of State for Employment. In a year he moved up to Secretary of State for the Ministry of Finance.

Jacques Chirac came into national politics as the representative of his department in the National Assembly. By then Georges Pompidou had been elected President and chose Chirac as Minister of Agriculture. He served in that position from 1972 to 1974. Chirac was promoted to Minister of the Interior in March of 1974 but in April of that year Georges Pom;idou died.

In the ensuing struggle for leadership of the Guaullist political party Chirac threw his support behind Valéry Giscard d'Estaing and against the heir apparent. When Giscard won the nomination of the Gaullists and went on to win the Presidency of France against Mitterand, Chirac won friends and respect for his political astuteness but he also gained bitter enemies.

Valéry Giscard d'Estaing
Chirac's reward was the prime ministership in 1974. But after two years Chirac felt he could no longer function as Prime Minister under the conditions imposed by Giscard and so Chirac resigned in 1976. This marked a political split between himself and Giscard.

At the end of 1976 Chirac created a reorganized Gaullist party named Rassemblement pour la République (RPR). In 1977 Chirac ran for the newly recreated office of mayor of Paris.

The Mayorship of Paris gave Chirac invaluable administrative and political experience. It gave him a political power base and credibility for national office.

In the 1981 Presidential election Chirac ran in competition with Giscard but trailed Giscard in the voting. In the runoff election between Giscard and Mitterand, Chirac supported tepidly Giscard. Mitterand won and in the legislative election later in 1981 the Parti Socialiste also won.

Chirac political stature grew during the period of Socialiste rule on the national level. Chirac was re-elected as Mayor of Paris in 1983 and candidates from his RPR party or allied Gaullist parties won in all of Paris' election districts. He had built a formidable political machine in Paris.

In 1986 the Gaullist parties defeated the Socialists in the national election and Chirac, as head of the largest Gaullist party, was asked to take the office of Prime Minister. The Socialist President's term had two more years to run so it would not be an easy time for being Prime Minister. The situation of the President being of one party and the Prime Minister being of an opposing party is referred to by the French as cohabitation.

Chirac's term as Prime Minister was complicated by Chirac's intention of running for President at the next election in 1988. So he had to produce results quickly despite the power of the opposition President to thwart him at every step. Chirac's tasks were further complicated by the fact that programs such as privatization were not an inherent element of the Gaullist political philosophy. The Gaullist party tradition was corporatist and perfectly comfortable with state enterprise and public guidance and regulation of private enterprise. Chirac himself was a relatively late convert to the idea of privatization, but once he embraced the concept he pushed it with all of his considerable ability.

The Privatization Program

The Plan

Within a month of forming the new government, Chirac was able to present to the Assembly a plan for privatization. The plan called for the privatization of 65 enterprises over a five year period (A Five-Year Plan for Privatization!) The 65 enterprises had a workforce of 900 thousand and were thought to have a market value of 300 billion francs. If this plan were to be carried out it would involve privatization on a greater scale and at a faster rate than that carried out by the Thatcher Government in the United Kingdom. This plan went far beyond reprivatizing the enterprises that had been nationalized by the Socialists during the period 1981 to 1986. Included in the privatization plan were enterprises such as the Renault automobile company which Charles de Gaulle had nationalized in the immediate post-World War II period. François Mitterand characterized these enterprises as national assets. Probably few outside of France would have characterized Renault as a national asset.

Mitterand opposed the privatization plan and announced that he would prevent any transfer of ownership which would threaten the national independence of France. By this he meant that he would not permit the acquisition by foreigners of enterprises vital to France's national interests. Many of the nationalizations under the Socialist government from 1981 to 1986 were based upon ending foreign control of enterprises such as in the computer industry that might be vital to the military defense of France. Mitterand announced his opposition to privatization on basis of preserving national independence on Bastille Day.

Chirac's government plan made provision for preventing foreign acquisition of control of the privatized firms. At the initial public offering the foreign share of ownership could not exceed 20 percent. Also within a five-year period following privatization the government could prohibit any acquistion involving more than 10 percent of the shares of a firm. Furthermore there were existing regulations concerning foreign acquisition of share ownership of a company.

Chirac had initially hoped to implement the privatization plan by fiat without holding public debate in the Assembly, but Mitterand announced his belief that so important a change in past policy should be debated in the legislature.

The Chirac plan also intended to promote widespread sharehold by small investors, so-called popular capitalism. To this end 10 percent of the shares of an enterprise to be privatized were reserved for purchase by the employees of the enterprise. However the proponents of the plan recognized that completely dispersed ownership might leave the enterprise management without effective shareholder control so they provided for the creation of hard cores of shareholder groups who would effectively exercise shareholder control over enterprise management. These hard core shareholder groups, in French noyau dur, would be five percent blocks of ownership. From 15 to 30 percent of the shares of privatized enterprises were to sold to institutional groups.

The Chirac government also intended to replace the managers of the enterprises to be privatized. In part, this replacement of managers was to get rid of the Socialist-appointed managers from the 1981-1986 period. The replacement was justified on the basis of the importance of suitably oriented managers to the privatization process. And it would not hurt if such managers were supporters of Chirac's party or its allies.

The Implementation

The Chirac government commenced the privatization program cautiously in October of 1986. The government's first action was to sell 11 percent of the petroleum-petrochemical conglomerate Elf-Aquitaine. This partial privatization left the State still owning 50 percent of Elf-Acquitaine so this privatization did not change much institutionally. It was in large part a test of the capital market's appetite for privatizations. The response was favorable.

In November of 1986 the Chirac government undertook a more serious privatization, the selloff of Saint Gobain. St. Gobain was an enterprise that was nationalized under the nationalization program of the Socialists. The selloff was a reprivatization. St. Gobain was a multinational firm with a labor force of 150 thousand and profits in 1986 of 1.3 billion francs. The Socialist government had purchased St. Gobain in 1982 and an extensive investment program had been carried out to update the enterprise's equipment and production facilities. This investment program increased the indebtedness of the company but the privatization offering was oversubscribed.

In early 1987 the financial enterprise Paribus was offered for sale and again the offering was also oversubscribed. The State received for St. Gobain and Paribus almost 22 billion francs upon their privatization sales. The Socialist had paid 11 billion francs for the two enterprises. Thus the State received an almost 100 percent return on a four-year investment.

The enthusiasm for privatization, both within the government and among the general public, was high and the Chirac government to three major enterprises:

The privatizations were carried out successfully but there was not the same degree of oversubscription that characterized the immediately preceding privatization, raising the fear that the magnitudes of the privatizations were impinging upon the capacity of the capital markets to absorb additional privatizations.

The next privatizations were to be of the Compagnie Financiére de Suez, a financial conglomerate, and Matra, an industrial and communications conglomerate. The worldwide collapse of stock prices in October of 1987 put the privatization of these firms on pause but the Suez firm was privatized in November of 1987 and Matra in January of 1988. The fall in stock prices in that period made investors aware of the risks of stock investment. Prior to that period the shares of previous privatizations were trading at a premium over the price at which the shares were sold to the public. After October of 1987 potential buyers were acutely aware that they could actually lose money on privatized businesses.

Although the Chirac privatization program more or less ground to a halt in early 1988 there was a considerable amount that was achieved. By February of 1988 29 of the 65 enterprises which the Chirac program of 1986 planned for privatization had been privatized. The privatized enterprises had a workforce of about one half million. The sales produced revenue for the State of 120 billion francs. The program had promoted popular capitalism in that there were five million more stock owners, including the workers who purchased stock in the companies they worked for. The cessation of privatization may have come as much for political considerations as concern for capital market condition. Chirac and his supporters were reluctant to take a chance on becoming embroiled in some mistaken or unpopular privatization immediately before the elections for the Presidency and the Legislature. Jacques Chirac of course intended to be a candidate for President of France.

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