Commentary

Privatizing Taiwan’s state-owned enterprises

(Courtesy of CPC Corp.)

• Publication Date：05/13/2012
• Source： Taiwan Today
• By  Chu Yun-peng

In Taiwan, gasoline is imported from overseas, processed at local refinery plants, bought at wholesale by gas stations, and finally sold to the consumer at retail prices. This means that four factors determine the domestic price of oil: import costs, the exchange rate, refining costs and extra fees added on by retailers.

But for some time now CPC Corp., the nation’s state-run petroleum company, has not been able to faithfully reflect the true cost of imported oil in its wholesale prices. This is the source of the recent controversy surrounding oil price increases. After suffering tremendous losses, CPC has finally been given permission to charge wholesale prices that reflect import costs. The price of oil at the pump has shot up as a result, causing much public dissatisfaction.

The four factors mentioned earlier are independent of one another and should be discussed separately. Of course, as has been suggested, the Ministry of Economic Affairs should exert pressure on CPC to increase its productivity, which in turn would help to lower operating costs. But this is something that should be done in any case and on a regular basis. It has nothing to do with the recent changes in oil prices. The MOEA’s State-Owned Enterprise Commission should ask CPC to set core performance indexes; and based on whether these targets are met, CPC employee levels will be given the appropriate bonuses. Generally speaking, the better the performance of CPC, the lower the refining costs. If improved productivity resulted in lower retail prices, everyone would be pleased.

(CNA)

Once such a system has been put in place, however, other factors that have an influence on prices, such as import costs and exchange rates, ought to be fully reflected in the retail price. It makes no sense to suddenly start paying attention to productivity when prices go up, just as it makes no sense to forget about it when prices go down. The same kind of reasoning applies to fluctuations in the exchange rate: If the New Taiwan dollar depreciates, the cost of oil will go up, just as it would go down if the NT dollar appreciates. These things have nothing to do with CPC’s productivity.

In the vast majority of cases, the correlation between international and domestic prices should be observed. Even if the link between the two is temporarily severed when international prices fluctuate, in the long run the correspondence between the two still needs to be kept. The cost of oil should be a reflection of how scarce the product is. If this principle is followed, the birth and development of fuel-efficient products would be encouraged.

Of course it is possible to temporarily disrupt the connection between the domestic and international prices of oil. But this is like taking an analgesic: It eases pain in the short run, but provides no real cure. Misusing resources in the long run is sure to result in even more painful consequences.

Some have suggested that state-run enterprises such as CPC and Taiwan Power Co. ought to be privatized, so as to spur them to increase their productivity. This is certainly something that should be carried out eventually. But complementary measures will also have to be put in place. For economies of scale mean that most state-run enterprises are monopolies or at best oligarchies; so even after they are privatized, they still have to be heavily regulated, including in terms of the prices they are allowed to charge.

But if the government simply forces companies to make no more than “reasonable profits,” it would cause them to lose all incentive. The companies would not incur a loss if they took things easy; and even if their performance were exceptionally good, they would make no more than what had been permitted. Under such a scenario, a private enterprise would become as lethargic as a state-run one. So there must be careful planning when it comes to the handling of state-run monopolies.

(CNA)

A decade ago, the idea of privatization was seen as a trump card that no one dared to question. But things are vastly different now. In advanced industrialized nations, some cases of privatization have been successful, while others have turned out to be failures. There have been instances where prices skyrocketed after privatization, even as there was a decline in customer service levels. Thus privatization should not be carried out for the sake of fulfilling some slogan; it should be done only as a means of increasing productivity.

There is another type of privatization, where the government’s ownership of a company falls to below 50 percent, and where the remainder of the shares is sold to individual shareholders among the general public. This makes it possible for a company to be privatized while allowing the government to retain executive control. Such a move would definitely help when it comes to giving the government more power over personnel costs and budgeting. It would also provide a nice transition to full privatization. But it should not be confused with privatization itself.

Under no circumstances should privatization be carried out hastily—history is replete with examples of what can happen when privatization goes wrong. This being the case, the public should not sit and wait for state-run enterprises to become private, as if that would cure everything. Instead, it should ask how productivity at these firms can be increased, even when they are operating as state-owned companies. The government needs to find competent management teams to lead these firms, which need to be given the kinds of incentives that will encourage them to reform. Many cases from abroad show that this can be done. There is no time to waste. (HZW)

Chu Yun-peng is professor of economics at the National Central University. These views are the author’s and not necessarily those of Taiwan Today. Copyright © 2012 by Chu Yun-peng

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