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State holding companies: an opportunity for economic transformation?

Photo by Markus Spiske on Unsplash

By Laurie Macfarlane and Simone Gasperin

According to recent reports, the UK government is planning to create a new state holding company to rescue strategically important firms that have been affected by COVID-19. Under so-called ‘Project Birch’, HM Treasury is exploring options to establish a “public-sector-owned funding body” to take equity stakes in troubled but otherwise viable businesses.

At the same time, following the recent “Decreto Rilancio” the Italian Government is endowing Cassa Depositi e Prestiti (CDP) — its state-owned investment bank — with a €44 billion fund to make equity investments in medium-to-large size industrial companies that are struggling because of the pandemic.

The UK and Italy are not alone: many countries around the world are looking at establishing similar vehicles to deal with the economic fallout from COVID-19. Even the International Monetary Fund (IMF) has endorsed the idea: in a recent blog four senior IMF researchers wrote: “If the crisis worsens, one could imagine the establishment or expansion of large state holding companies to take over distressed private firms.”

In this blog we look at the historical experience of state holding companies and similar entities in the UK and Italy, and draw lessons on how these organisations can — if structured and governed effectively — be effective tools for economic recovery and transformation.

The UK experience

The Industrial and Commercial Finance Corporation (ICFC)

According to the Financial Times, one model that the UK Treasury is considering for the new entity is the Industrial and Commercial Finance Corporation (ICFC). The ICFC was created by the 1945 Labour government to provide debt and equity to small and medium-sized companies. The ICFC was owned by a consortium of the ‘big five’ clearing banks and the Bank of England. From the beginning, the ICFC faced considerable opposition form the clearing banks who saw it as unnecessary and a potential threat. The Bank of England was also unenthusiastic, and resisted attempts to formally link the ICFC to the government’s industrial policy.

Initially the ICFC focused on small manufacturing companies in the early development stage and was committed to long-term investing. In the decades that followed the ICFC was successful in fostering long-term relationships with SMEs and providing access to finance through a regional branch network.

In 1959 the clearing banks allowed the ICFC to raise external funds by issuing shares, which created new pressures to deliver shareholder returns. In 1973, the ICFC acquired Finance Corporation for Industry (FCI) — the ICFC’s sister company that was also established in 1945 to finance large companies. The new group was renamed Finance for Industry (FFI), and was given a broad mandate to fund the growth of British industry. A combination of shareholder pressure and challenging economic circumstances eventually led FFI to seek out new sources of profit. By the early 1980s, the group had become a specialist in management buyouts and had largely abandoned its original mandate.

In 1983 FFI was renamed Investors in Industry, and in 1987 the group was privatised as the 3i Group. Today 3i is a major private equity and venture capital firm, with a market capitalisation of around £8bn.

The Industrial Reorganisation Corporation (IRC) and National Enterprise Board (NEB)

In the following decades, there were two other notable attempts at establishing a UK state holding company. In both cases, the aim was to restructure and modernise British industry through a direct influence on the long-term strategies of key companies.

In 1966, under the Harold Wilson’s Labour government, the newly created Department of Economic Affairs, together with the Ministry of Technology and the Board of Trade sponsored the establishment of the Industrial Reorganisation Corporation (IRC). Rather than a formal state holding company, the IRC ended up being a state merchant bank, organising and financing mergers in the automobile, electronics engineering and computer sectors, to create three leading national champions: British Leyland, General Electric Company, International Computers Ltd.

The IRC was wound up by the Heath government in 1970, but a second attempt to develop a British state holding company came with the 1975 Industry Act — again passed by the new Labour government. This time, the National Enterprise Board (NEB) was established to take over, restructure and define the industrial planning of nationalised manufacturing companies (Rolls-Royce, British Leyland, British Shipbuilders, British Aerospace and others), as well as to diversify into new sectors such as biotech (through Cell-Tech, a global leader in bio-pharmaceuticals) and semiconductors (with Inmos, a company that created the transputer microprocessor). The NEB remained an active instrument for investment and industrial transformation until 1980, when a new Industry Act by the Thatcher Government turned it into a vehicle for divesting its controlling companies. Eventually, the heir of the NEB was privatised in the early 1990s.

Both the IRC and the NEB were explicitly modelled on the example of IRI, Italy’s cherished state holding company, which we discuss further below.

UK Government Investments (UKGI)

Today the UK Government manages its domestic investments via UK Government Investments (UKGI), which is a company wholly owned by HM Treasury. UKGI was formally known as UK Financial Investments Limited (UKFI), which was created in November 2008 as part of the UK’s response to the financial crisis. Described as “the government’s centre of excellence in corporate finance and corporate governance”, UKGI acts as shareholder for the UK government’s portfolio of 17 businesses and arm’s length bodies, including the Government’s shareholding in the Royal Bank of Scotland Group plc. It aims to “help these businesses optimise their performance to operate as commercially as possible.”

Figure 1: Entities in UKGI’s investment portfolio

Although the UK government has always claimed that it does not exercise direct influence over the decision making of publicly owned entities such as RBS, and are instead managed entirely at ‘arms-length’, in practice this has not always been the case. For example, the former Chancellor of the Exchequer George Osborne is widely known to have forced out RBS’s former Chief Executive, Stephen Hester. In addition, in 2013 the Parliamentary Commission on Banking Standards concluded that “the Government has interfered in the running of the partly State-owned banks, particularly RBS. On occasions it has done so directly, on others it appears to have acted indirectly, using UKFI as its proxy”, describing UKFI as “a fig leaf to disguise the reality of direct Government control.”

The Italian experience

Istituto per la Ricostruzione Industriale (IRI)

IRI was an acronym for Istituto per la Ricostruzione Industriale (“Institute for Industrial Reconstruction”). Its establishment in 1933 as a state holding company was unintentional: it was the consequence of the bailout of the three largest Italian banks, which were facing collapse following the Great Depression of the early 1930s. Established with the aim to restore the balance sheets of the three banks, it soon became clear that their assets were filled with shares — often controlling stakes — of large industrial companies in several different sectors. Through IRI, the state had become the owner of the largest industrial complex in the country, owning 21.5% of Italy’s shares in joint-stock companies.

Figure 2: IRI’s share of national production or economic activity in each major sector of involvement in 1948

Source: Author’s elaboration from archival documentation.

After the Second World War, IRI played a crucial driving role in post-war reconstruction and in the “economic miracle” period (1953–1963). IRI’s steelmaking companies — representing around 50% of national production — produced high quality and low-price steel for the crucial mechanical sector (where IRI’s share of total production was more than one quarter). IRI’s shipping companies activated demand complementarities in IRI-owned shipyards. In the 1960s, IRI built Italy’s motorways and telephone networks with a high degree of technical efficiency where private initiative was lacking. It also developed the airline company Alitalia.

Throughout its existence, IRI kept investing and diversifying into new sectors and technologies, becoming the national and often a European leader in aerospace, microelectronics, complex systems engineering and telecommunication technologies. What became known as the ‘IRI formula’ involved mixed private-public ownership of certain companies, with the state co-owning companies with private investors. Some of these companies were listed on the stock market, accounting for 21.3% of total market capitalisation in 1990.

Figure 3: IRI’s shareholding structure in 1974

The coloured columns represent its sectoral holding companies (telecommunication, shipping, steelmaking, mechanical engineering, shipbuilding and civil engineering).
Source: IRI Annual Report 1975.

In 1992, the moment that marked the beginning of its ten-year liquidation process, IRI was the world’s tenth largest industrial corporation in terms of sales, the fourth largest in terms of assets and the fifth largest industrial employer. In the same year, IRI was employing 1.6% of the total workforce in Italy (around 385,000 employees), representing around 3% of domestic value added, 5.1% of national investments and 5.4% of total exports, as well as performing 14.5% of national R&D expenditure (26% of total business spending).

In 1992, IRI was transformed into a joint-stock company and its companies were gradually privatised. The receipts of IRI’s privatisations from 1992 to 2000 totalled 105,000 billion lire (more than €50 billion in current prices), which was mostly used to reduce the stock of national public debt. When IRI was liquidated in 2002, the net value of its remaining assets held by the Treasury was positive and amounted to more than €20 billion.

Cassa Depositi e Prestiti (CDP)

Today, Cassa Depositi e Prestiti (CDP) — Italy’s state-owned development bank — is often wrongly considered to be IRI’s heir. Like IRI, CDP is a financial holding company, owning controlling stakes into major companies such as Eni, Snam, Saipem in the energy sector, Open Fiber in telecommunications, Fincantieri in shipbuilding, Poste Italiane in postal and insurance services. These are among the largest industrial companies in Italy today.

However, compared to the industrial policy orientation of IRI, CDP has adopted the passive shareholding approach of an asset manager, mostly focused on maximising annual financial returns. While IRI elaborated four year industrial plans for its companies in each sector, CDP does not develop a coordinated mission strategy for its controlled companies. If IRI’s experience can be interpreted as a case of active state entrepreneurship, CDP represents a passive form of state shareholding.

Figure 4: CDP’s shareholding structure in 2019.

Source: CDP Annual Review 2019

Key lessons

What lessons can we learn from the above examples? Firstly, ownership of the holding company matters. In the case of the ICFC, it was co-owned by large private banks who were antagonistic towards its existence and had little incentive to protect its core purpose. In a similar way, although the Italian Ministry of Economy and Finance own the majority (82.7%) of CDP’s shares, private bank foundations hold the remaining shares. This creates pressure to redistribute earnings instead of retaining and investing them strategically. In contrast, the NEB and IRI were wholly public entities.

This suggests that the public interest is best protected when ownership lies solely with the state. However, as many of the above examples show, state ownership is a necessary but not a sufficient condition for long-term success (particularly where there is an absence of bipartisan support).

The mandate of a state holding company is also crucial for determining the role it plays in the economy. In theory, there are two opposing models: one is where the state holding company is focused purely on maximising the financial returns of its portfolio. Under this approach, the holding company is mainly concerned with ensuring that the companies it is invested in are being managed commercially to maximise profits (or in the case of the present downturn, socialising losses before returning them to private ownership as soon as possible).

An alternative model is where the state holding company treats its operating companies as subsidiaries, effectively becoming an integrated multidivisional group. Under this model, the holding company coordinates decision-making in order to promote long-term structural transformation and wider public policy objectives.

While the first approach is one of passive shareholding, the second approach actively exploits the economies of scale and sectoral diversification of a state holding company to obtain a transformational impact on the industrial landscape.

These two competing models are mainly conceptual: in practice, most state holding companies operate somewhere in between. But today most sit much closer to the first end of the spectrum: their main aim is to make sure that the controlled companies are managed commercially and generate financial returns.

However, at a time when governments across the world are facing major social and environmental challenges such as tackling climate change, reducing inequalities and adjusting to demographic changes, state holding companies could be an effective way to promote strategic industrial policy objectives. In practice this would mean coordinating business investment plans; identifying and activating technological interdependencies and synergies; and shaping the long-term strategies of operating companies in line with strategic public policy objectives such as decarbonisation.

Importantly, this coordination must be done in a way that is open and transparent, with appropriate governance mechanisms in place to avoid interference in day-to-day management and capture by special interest groups. Seeking to influence decision making covertly, as the UK Government has done with RBS, runs the risk of undermining public trust.

Institutional capacity and expertise is also important. Whereas a state holding company that is concerned only with financial returns will require staff with competencies in finance and accounting, a more activist state holding company may also require a broader range of skills and expertise. Developing in-house scientific and technical capacity, for example, can enable decisions to be based on a wider set of criteria than relying on market signals alone.

History shows that the quality of management and the public technocracy is fundamental to the success of activist state holding companies: IRI was able to attract some of the best available talent in the country, as its employees were motivated by the idea of working in a prestigious and dynamic organisation with a strong sense of public purpose.

How a state holding company is monitored and evaluated also matters. Where the aim is to promote structural transformation and public policy objectives, financial metrics of performance may not be sufficient, and may even paint a misleading picture of performance. As a result, new monitoring and evaluation frameworks may be required that capture the dynamic impacts of market shaping policies such as multiplier effects, sectoral spillovers, the creation of new technologies and the shifting of technology frontiers.


State holding companies are sometimes considered to be a thing of the past. However, organisations such as the OECD recognise the important role they can play, and actively encourage their creation. The OECD’s Guidelines on Corporate Governance of State-Owned Enterprises states that “The exercise of ownership rights should be centralised in a single ownership entity, or, if this is not possible, carried out by a co-ordinating body.”

Moreover, state holding companies are even more relevant in non-OECD economies. China’s State-owned Assets Supervision and Administration Commission (SASAC) is the world’s largest industrial entity, controlling 96 large companies in various sectors like aerospace, chemical, shipbuilding, telecommunications, automotive, energy. The companies under its control have combined assets of $26 trillion and revenue of more than $3.6 trillion.

Even before COVID-19, state holding companies were already playing a significant role in many economies. As more governments look to utilise their full potential, the debate should not be about whether they should exist, but how they can be structured and governed most effectively.



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UCL Institute for Innovation and Public Purpose

UCL Institute for Innovation and Public Purpose

Changing how public value is imagined, practiced and evaluated to tackle societal challenges | Director: Mariana Mazzucato | Deputy Director: Rainer Kattel