Taiwan's state-run enterprises are getting revamped and in some cases sold off in the quest for a leaner, more efficient public sector.
What is a nation to do when its public-sector enterprises, often essential to the public interest and sometimes mammoth in scale, are performing poorly? One answer is for the state to turn to the private sector and sell off part or all of a state-owned enterprise (SOE).
This process is referred to as privatization, a term defined differently in different countries but indicating a concerted effort by a government to make an SOE more profitable by allowing in private money, and often private management, through a change in the ownership structure of the enterprise. "Privatization and market forces just result in better allocation," says Christopher Hunt, head of Research at Macquarie Securities Limited, Taiwan Branch. "Privatizing nationalized businesses forces them to compete and increase efficiency. That efficiency allows growth of productivity and profitability, which in turn create more jobs."
It is that efficiency and the natural focus of the private sector on results that capture the interest of governments, but achieving those results perhaps requires a different strategy for every economy. The United Kingdom in the 1970s suffered from a stifling economic slowdown and a moribund state sector. "Margaret Thatcher came in and identified the problems: too much government participation and excessive power of trade unions," says Hunt. "She did a lot of privatization and deregulation that enabled the country to have 20 years of prosperity."
In Taiwan, the government is taking a more gradual approach in the hope of achieving those same results amid arguably very different economic conditions. The privatization push began in 1989 after decades of direct government intervention in the economy, which is often credited with stimulating Taiwan's economic growth through the fostering of capital-intensive sectors, such as energy, transportation and petrochemicals.
As Taiwan's economy evolved into the thriving export-oriented model of today, the private sector, however, became the prime engine of growth. As a result, the government has been trying to revamp and in some cases shed SOEs. "The main concept of privatization is to change the government's role," says Hsieh Fadah, vice chairman of the Council for Economic Planning and Development (CEPD). "In other words, the government has to diminish its intervention in business as much as possible, allowing the private sector to fully develop its vitality in the free market."
The first step toward the privatization of SOEs has been to reduce government holdings to below 50 percent, the threshold for privatization according to local regulations. This has been accomplished primarily by selling off stock in public companies, auctioning assets and entering into joint ventures. So far, a total of 34 SOEs have been privatized, and another 17 were shut down. The cumulative value of stocks and assets sold was estimated at some NT$700 billion (US$21 billion).
Privatization has improved the performance of most of the industries, Hsieh says. The annual after-tax revenue of the China Steel Corp., for example, averaged NT$11.8 billion (US$358 million) over the last three years before it was privatized in 1995. In the three-year period after going private, its annual revenue climbed to NT$17.4 billion (US$527 million), and today the company is expanding.
Hsieh also notes the progress made by the Taiwan Transport Co., which was privatized in 2001, purchased by its employees and reorganized under the name Kuo-Kuang Motor Transport Co. The company managed to turn accumulated financial losses of NT$40 billion (US$1.2 billion) before it was privatized into the current monthly earnings of some NT$10 million (US$303,030).
Reasons for Caution
The government hopes to privatize the remaining 15 SOEs, including the China Shipbuilding Corp., the Taiwan Power Co. (Taipower), the Bank of Taiwan and the Central Trust of China (CTC), according to Hsieh. The privatization of government holdings, however, is a complicated process. The Legislative Yuan, Taiwan's legislature, must approve privatization proposals, which need to take into consideration employee rights and interests (employees, it should be added, who are also voters).
Shih Jun-ji, a researcher at Academia Sinica, a government-sponsored research institute, points out that privatization could affect the livelihood of tens of thousands of government employees. He notes that Taiwan's social security system, although improving, is still not as comprehensive as those in many advanced industrial countries. Shih thinks that the government should exercise special caution before plunging ahead and consider whether the ongoing privatization drive is really conducive to Taiwan's development.
Another fundamental factor hampering privatization is the financial health of the industries and their potential profitability. Buyers quite simply are more interested in some SOEs than others. SOEs engaged in manufacturing, such as China Steel, China Petrochemical Development Corp. and Taiwan Machinery Manufacturing Corp., have already been privatized. Investors identified the market potential of these companies and believed they could be profitable competitors in the private sector. Yet, not all SOEs are so appealing to the private sector.
Currently, the government's privatization drive is targeting public utilities, including Taipower, the Chinese Petroleum Corp. (CPC) and the Taiwan Water Corp. Even if investors are willing to buy into these companies, they will continue to operate under tight government regulations because they involve basic services expected by citizens. If for example, a power company is privatized, it might not see the profitability of providing electricity to a remote mountain village. The government, however, would risk censure if it left some citizens in the dark. These industries, in other words, will always be affected by non-market considerations, and therefore they are potentially less appealing to private investors.
Getting to Market
Shih notes that a quick look at the fundamentals of the companies is enough to scare off some investors. The CTC, for example, has a current market value of about NT$21 billion (US$636 million). But according to the law, if privatized, it would be required to offer NT$18 billion (US$545 million) in compensation to its employees. Shih believes that privatizing the company would be like "killing the hen to get the egg."
To increase the profitability of SOEs, the government has engaged in corporatization schemes to make the publicly owned companies look and behave more like bottom-line-oriented businesses. Shih argues that privatization is not necessarily the only means to boost operational efficiency. "State-run enterprises do not necessarily have to be privatized, but they definitely have to emphasize entrepreneurialism," he says. "The government can start by relaxing the legal regulations on personnel and procurement to raise efficiency, rather than pursuing privatization as a cure-all."
Shih notes that some government-run businesses and services have fared quite well. He points out, for example, the success of the Taipei Rapid Transit Corp., owned by the Taipei City Government, in offering good services and running efficiently. Other SOEs, such as the Taiwan Sugar Corp. (Taisugar) and CPC have also improved profits by diversifying and restructuring. There is in fact quite a healthy academic debate over the connection between ownership and profitability, with some arguing that ownership is not one of the weightier factors in the equation.
Sun Keh-nan, a research fellow at the Chung-Hua Institution for Economic Research, wonders if private owners for public enterprises would really benefit the public. He fears the rise of monopolies, since so few competitors can afford to enter such capital-intensive and highly regulated industries. There have been questions about some government-owned assets being sold below market prices, thus adversely affecting the interests of the employees, he says. He argues that transparency in the sale of public assets is essential to keeping public confidence in the government and reassuring the employees of SOEs.
Despite his reservations, Sun believes that privatization is still the way to go. In fact, he believes that the government should completely withdraw from business operations by releasing all ownership and asset rights to the "privatized" firms. "Even though the government cuts its holdings down to under 50 percent, it's still likely to be the biggest shareholder, and thus capable of directing management and appointing personnel," he says. "But at the same time, the company can get rid of government supervision and legal control. The result of such halfway privatization might be worse than before."
Macquarie's Christopher Hunt points out that if the government dictates how a business runs from the board of directors and places political or social concerns above the interests of the shareholders, it risks reducing the efficiency of the enterprise. "The government wants to have a stake in certain strategic industries, but instead of exerting influence on management, it should allow the private sector to run the business and compete on a level playing field," he says.
Hunt also says that while the government might want to retain some control of certain strategic industries, like utilities, it could relinquish its interests in others. "I just don't see why it needs to hold stakes in the banking sector," he says. He notes that private banks in Taiwan have fared well with open-market competition. "Your economy will grow much stronger if you let market forces play a major role," he says. "The bottom line is one votes the government to manage taxes and provide good infrastructure, education and health care, rather than managing corporations."
More Might Be Better
The government is in fact pushing below that 50 percent threshold and shedding more ownership rights on the path toward full privatization. It hopes to reduce its stake in the banking sector to under 20 percent and in the telecom and transport sectors to under 33 percent in the next five years.
Hunt says that overall the government's intention to privatize nationalized business is good, but its execution is slightly worrisome and needs to be improved. One problem, he points out, is the bidding process. The rules sometimes are not entirely transparent, and this complicates things for potential buyers, especially foreign investors who are not as familiar with the market, and erodes confidence in the process. "If you want foreign participation in the market, you've got to keep the process simple and stick with it," Hunt says. In thinking about privatization, Hunt suggests a whole range of possibilities beyond state-run enterprises. "Privatization can extend to all areas of the economy, including infrastructure works, like port and airport facilities," he says. "These public projects should be opened to the private sector that has the expertise to run them well and get better returns. That'll benefit customers, private enterprises and the government."
Liu Teng-cheng, director-general of the National Treasury Agency of the Ministry of Finance (MOF), says that further opening Taiwan's economy is just what the government is trying to do and that ultimately its goal is to completely withdraw from business.
Among the factors complicating the process is that the SOEs are operated under the supervision of different parts of the government. Taisugar, Taipower and the CPC, for instance, fall under the Ministry of Economic Affairs, while Chunghwa Post and Taiwan Railway Administration are regulated by the Ministry of Transportation and Communications. And the MOF controls the Taiwan Tobacco and Liquor Corp. and all state-owned banks.
To centralize management the MOF has proposed the establishment of a government holding company by following the example of Singapore's Temasek Holdings, which owns and manages the Singaporean government's direct investments domestically and internationally.
If the proposal is adopted--it has been approved by the Cabinet and awaits approval in the Legislature--the MOF will become the sole regulatory body for all government-owned companies, simplifying things considerably. "This reform plan can separate management from ownership in the state-run enterprises to prevent the government from acting as a business manager and a regulator at the same time," Liu explains. "Also, the centralized management will be able to shorten the decision-making process and institutionalize privatization procedures."
Privatization ultimately relies on the political will to make difficult decisions and the foresight to balance competing interests. "Privatization is a hard political decision as it'll displease some voters," says Christopher Hunt. "Nevertheless, Thatcher, for instance, was able to accept the social costs (initial large-scale labor strikes and unemployment) and proceed. And she was either loved or hated." In Taiwan, privatization is being set in motion more slowly, in part to avoid some of those painful social costs while still trying to reap the benefits of Taiwan's vibrant marketplace.