Early this year, the privatization plan of the state-run BES Engineering Corp. ended up a fiasco. With capital of NT$3.3 billion (US$127 million), BES had intended to sell 60 percent of its shares on the stock market, becoming the first government firm to go private. But by January 16, the scheduled deadline, only 8.5 percent of the shares had been purchased. The failed plan reflects the great difficulties facing the ROC government's overall privatization program.
Government-run enterprises have had a long and often prosperous history. The first ones were companies formerly run by the Japanese government during its occupation of the island (1895-1945). At the end of World War II, the ROC took over these firms, which dealt mostly in the manufacture of daily necessities and agricultural products. In the post-war rubble of the 1950s, these companies served as the backbone of the island's economy, laying the groundwork for the economic take-off of subsequent years.
The government gradually expanded to encompass many fields, including public utilities (power and water), heavy industries (petroleum, steel, and shipbuilding), key agricultural products (tobacco, wine, sugar, and fertilizer), and key service sectors (transportation, telecommunications, postal services, banking, insurance, and civil engineering). These businesses were important to industrial development and also required much greater capital than the private sector could bear. By providing important products and services at comparatively low prices, the government was able to improve living standards. In addition, the government's vigorous investments were a strong stimulant for economic growth.
Today, the central and provincial governments own thirty-nine enterprises as well as eighty other businesses that are organized as administrative agencies. Total assets of all government companies amount to NT$1 trillion (US$38.5 billion), and they employ 170,000 people. Several of Taiwan's state-run firms are listed in the Fortune 500 (based on the 1991 ranking): the Chinese Petroleum Corp. (49th), Taiwan Power Co. (81 st), China Steel Corp. (191 st); Taiwan Sugar Corp. (423rd), China Shipbuilding (459th), and BES Engineering Corp. (476th).
BES Engineering expected to become the first privatization success story. But with the bearish stock market, no one was interested in buying the company's shares.
In fiscal year 1991 (July 1, 1990, to June 30, 1991), state-run enterprises generated NT$450 billion (US$17.3 billion) in gross output, or 9.96 percent of the GNP. They invested a total of NT$210 billion (US$8.46 billion), 22.5 percent of the island's fixed capital formation. In addition, they yielded NT$140 billion (US$5.38 billion) in profits, of which NT$86 billion (US$3.3 billion) were delivered to the national treasury, either through taxation or dividends on government-held shares.
But in recent years, state-run companies have faced a serious challenge. With the expansion of the private sector and changes in the overall economy, these firms no longer play a central role. In FY 1991, their gross output accounted for only 9.96 percent of the GNP, down from 13 percent in FY 1985.
Critics charge that multiple government regulations and inept management have left these companies laden with inefficiency, overstaffing, and low productivity. The result has been a serious waste of economic resources and a major constraint on further economic development. The problems have become more evident under the current economic liberalization policies, which have allowed private entrance into markets hitherto monopolized by state-run enterprises.
Consequently, some state firms have plunged into a deep ocean of red ink. The Taiwan Railway Administration (TRA), for instance, has suffered from competition with new domestic airlines as well as freeway transportation. In addition, redundant TRA personnel eat up a lion's share of the company's revenues. The administration is now NT$23.1 billion (US$888 million) in the red. Another state enterprise, the Taiwan Motor Transport Corp., which provides long-distance freeway bus services, is losing NT$300 million (US$11.5 million) every month, while its private rival, Tunglien Motor Transport, is earning NT$100 million (US$3.8 million) a month.
Some firms are keeping afloat mainly because of government protection. This has been the case with the Taiwan Sugar Corp. As a result, the price of sugar in Taiwan is three times the world level. Those state companies that are still generating handsome returns can do so largely because of their government-accorded monopoly status. An example is the Chinese Petroleum Corp., which has had annual profits of NT$15 billion (US$576 million) for the past two years.
Sooner or later, however, all of Taiwan's government-run enterprises will face intense private competition. The Fair Trade Law, passed last year, brings an end to the protected monopoly status of all government firms. Even Chinese Petroleum will soon have to contend with the Formosa Plastics Group. Once Formosa Plastics completes Taiwan's naphtha cracker, scheduled for operation in 1997, it will be a major player in oil refining and upstream petrochemical production. Eventually, the only way for firms like Chinese Petroleum to compete in the more liberal economic environment will be to go private themselves. As Vincent Siew (蕭萬長), chairman of the Council for Economic Planning and Development, remarked in a speech last year, when he was minister of economic affairs, "Privatization is an integral part of the liberalization process."
The ROC government decided to begin privatizing state-run enterprises in 1988. The decision was a reflection of the island's evolving business environment as well as the global trend toward privatization. Taiwan had hoped to follow in the footsteps of such countries as Japan and Britain, where state firms have been successfully turned over to private ownerShip. The ROC's privatization plans have been reinforced by the need for huge amounts of capital to implement the Six-Year National Development Plan.
Twenty-two enterprises were selected for the first round of privatization. These include BES Engineering, China Steel, China Shipbuilding, the China Petrochemical Development Corp., the Taiwan Machinery Manufacturing Corp., a number of banks and insurance companies, and several firms involved in transportation, agricultural, mining, or chemical processing. Not included are public utilities and companies related to defense and national security, as well as most of those firms that are operating at huge losses. The Taiwan Tobacco & Wine Monopoly Bureau is also excluded, since it is the government's biggest income source, and the Taiwan Sugar Corp., because of its huge real estate holdings. Separate plans are under way to transfer the government's telecommunications monopoly to private hands.
There are several major obstacles to the execution of the government's privatization plan. Foremost is the strong opposition of employees, who fear losing the handsome salary, fringe benefits, and security of a government job. Recently, in fact, about five thousand employees of state-run firms held a demonstration in Taipei to demand government-level pay raises and protection from layoffs during the privatization process. Another obstacle is that all state firms must undergo laborious government budget reviews before privatizing. This limits their flexibility in choosing the best time to float shares on the stock market. The vested interests of government officials supervising state-run firms pose another problem: some use their position to give high-paying jobs to friends or even to themselves after retirement.
One example of officials interfering in the privatization process is the case of the three commercial banks run by the Taiwan provincial government. Bank employees at Hua Nan, Chang Hwa, and First Commercial banks generally supported privatization. They knew they would have to face greater competition anyway, since new private banks were allowed to start operating in 1992. Moreover, the amount of shares owned by the provincial government in the three banks was already relatively low. Privatization should have gone smoothly, but it was blocked by the provincial assembly, which wants to maintain control of the banks. Says a ranking official of First Commercial, "All of our staff, from executives to clerks, look forward to privatization. The problem is that the provincial government and assembly won't let go." Wang Chien-shien (王建煊), legislator and former minister of finance, is even more direct in his criticism. "Some provincial assemblymen are reluctant to forgo the privilege of low-interest loans from the provincial banks," he says. "That's one major reason for their opposition to privatization."
Several measures have been undertaken in an effort to overcome the obstacles to privatization. In 1989, the Executive Yuan set up an ad hoc panel to establish the legal framework necessary for privatization. And in 1991, a critical breakthrough was achieved when the Legislative Yuan, after one and a half years of heated debate, revised the privatization statute.
The new law exempts firms undergoing privatization from budget-law restrictions and sets forth definite procedures for privatization. Companies can now go private either by floating their shares on the stock market or by selling shares and other assets through open tender. With the Executive Yuan's approval, a government agency can negotiate with specific parties for the sale of a state-run firm.
The revised law also includes a handsome employee compensation package, at a level rarely seen abroad. The package entitles all employees, whether they retain or leave their posts, to receive retirement pay from the old management in accordance with the Labor Standards Law, regardless of age or years of service. In addition, they can collect a bonus of six months' pay. Those who resign or are laid off within five years of privatization can claim severance pay from the new management, plus another six months' bonus. Employees will also have the option to purchase a certain amount of company shares. The compensation package, a victory for lawmakers representing labor interests, was designed to gain the support of wary employees and thereby give a push to privatization. In the end, however, the immense cost of the package has proved to be a disincentive, as it will cut deeply into any proceeds earned from selling state-run firms.
Following the enactment of the law, the government started to push actively for privatization. Several initial attempts, however, ended in failure. In April 1992, Chung Kuo Insurance Co., the Farmers Bank of China, and the Bank ofCommunications began putting company shares up for public sale. But the stock market continued to remain gloomy, and eventually the three firms abandoned the plan.
Then it appeared that BES Engineering, which earned NT$640 million (US$24.6 million) on revenues of NT$16.5 billion (US$635 million) in 1992, would become the government's first privatized company. BES executives knew they would eventually lose their prerogative in negotiating on public construction projects, a policy that has come under growing criticism, and would have to face stiffer competition. They believed privatization would be the only way to survive. To overcome internal opposition, company chairman Regis C. W. Chen (陳朝威) held sixty-one meetings to explain the situation to the company's 2,300 employees. There were also plans to raise NT$3.3 billion, equivalent to the company's capital, for employee compensation.
But when BES put its shares up for sale at NT$30.61 apiece, the public apparently deemed the price too high for the bearish market. Only 8.5 percent of the shares were sold. In a subsequent interview with the China Times, Chen criticized the government's procedure of allowing a committee of scholars and government officials to determine share prices for privatizing firms. "Many of the officials are adamant in their opinions," he said, "and this causes much trouble in releasing public shares."
Despite the setback, BES executives are determined to go ahead with their plans. According to a recent report in the Economic Daily News, Chen said the company will auction 50 percent of its shares to private parties.
Privatization plans elsewhere are also lagging behind schedule. The China Petro chemical Development Corp. (CPDC), with capital of T$9.6 billion (US$369 million), had already floated 20 percent of its shares on the stock market and planned to put another 40 percent up for sale by this June. But the Commission of National Corporations stepped in and put CPDCs plans on hold. The commission, which is under the Ministry of Economic Affairs, detennined that the offered price of NT$14-19 per share was too low to reflect the company's large realty holdings.
The Taiwan Machinery Manufacturing Corp., with capital of NT$6.4 billion (US$246 million), also planned to sell 61 percent of its shares by June 1993, but the Executive Yuan rejected its privatization package and asked for a re-formulation. The China Steel Corp., with capital of NT$72 billion (US$2.77 billion), had floated 23 percent of its shares on the market and planned to sell another 28 percent by June 1994. But since it has become clear that the shares will not be sold on schedule, the Legislative Yuan eliminated the company's budget for employee compensation in 1994.
These setbacks have led to renewed criticism of the government's privatization policy. Lin Chen-kuo (林振國), recently named minister of finance, has pointed out that it is not easy to interest buyers in government enterprises with a record of poor performance. On the other hand, he says, privatizing companies that have performed well may generate huge one-time profits for the government, but it will mean an end to a valuable source of money - potentially one-tenth of the central government's income.
And even the proceeds earned from selling will be reduced significantly when employee compensation costs are deducted. The provincial government calculates that for privatizing its thirteen enterprises, the outlay for employee compensation will amount to a staggering NT$66.7 billion (US$2.56 billion), or NT$1.5 million (US$57,690) per employee. Among the central government-run firms, China Steel will have to spend NT$16 billion (US$615 million) on employee compensation; China Shipbuilding, NT$14 billion (US$538 million); and China Petrochemical Development Corp., NT$3 billion (US$115 million). Overall, at least one-fifth of the proceeds from selling the twenty-two state firms on the initial list, estimated at NT$500 billion (US$19.2 billion), will go for employee compensation. As an alternative, Lin proposed that the government give priority not to privatization, but to enhancing the efficiency of its enterprises.
Premier Lien Chan (連戰), however, insists that the very purpose of privatization is to enhance efficiency, not merely to raise funds for infrastructure projects. In a show of the government's determination, the premier has instructed that privatization continue at an even faster pace, despite the difficulties. Many other government officials and lawmakers continue to back the policy as well. Among them, Legislator Wang Chien shien, former finance minister, has pointed out that the improved efficiency of privatized firms will mean greater tax revenues for the government.
Crucial to successful privatization is figuring out how to sell the huge number of shares of state-run firms. To make the task easier, the Ministry of Economic Affairs has passed several measures. These include allowing more foreign capital in the stock market as a way to increase the market's overall investment capital; greater diversity in the methods for selling shares of state-run firms (for example, by selling shares abroad, or by issuing convertible bonds); the option to lower stock prices for government-held shares during bearish markets; and more autonomy for government agencies in proceeding with their privatization plans.
Even if state-run companies can overcome the obstacles, privatization will not mean an automatic end to their problems. The changeover will be especially difficult during the initial stage, when the government has not yet sold its majority of company shares. As long as the government still has a say, the lack of consensus within official circles will remain a hindrance, and interference by people acting in their own interests will continue to slow progress. Once privatization is finally completed, former state-run firms will have to shed their old bureaucratic mentality and streamline their operations in order to survive private competition. As China Steel president Wang Chung-yu (王鍾渝) says, "Privatization is not a panacea. The key after privatization will be a personnel reshuffle."
Yeh Man-sheng (葉曼生), executive director of the Committee of National Corporations, points out other necessary measures as well: "In order to cope with management pressures after privatization, government-run companies should diversify their businesses, rationalize their organizations, and cut redundant personnel." BES, for example, plans to diversity into environmental protection engineering, steam-electricity cogeneration, and the manufacture of locomotive engines. To make the transition to the private sector, the company is also holding training classes for both managers and laborers. As BES and many other firms have discovered, the road to privatization is a long and rugged one. - Philip Liu (劉柏登) is editor-in-chief of Business Taiwan, a weekly newspaper published in Taipei.