Download Privatization and SOE Restructuring

Privatization
in
Asia
by
Dr. Klaus-Peter Kriegsmann
Bali, 11 May 2000
I. HISTORY
II. CORPORATE ENVIRONMENT
III. ADB INVOLVEMENT
I. HISTORY
Priivatization Revenues
in Developing Countries
1990 to 1998
Central
Asia
7%
South
Asia
4%
Africa
5%
East
Asia
14%
Eastern
Europe
14%
Latin
Am erica
56%
Privatization Revenues in Developing Countries
70,000
60,000
US$
50,000
40,000
30,000
20,000
10,000
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
Year
Privatization Revenues in
Central Asian Republics
8,000
7,000
6,000
US$
5,000
4,000
3,000
2,000
1,000
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
Year
Privatization Revenues in
South Asia
3,000
2,500
US$
2,000
1,500
1,000
500
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
Year
Privatization Revenues in
South-East and East Asia
12,000
10,000
US$
8,000
6,000
4,000
2,000
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
Year
II. CORPORATE
ENVIRONMENT
Institutional Economics
Prerequisites for Prosperity
• Effective standards of corporate governance;
• corporate transparency and adequate external
auditing;
• efficient stock exchanges;
• competitive capital and output markets;
• competitive, independent, and transparent banking
systems;
• efficient and transparent legal frameworks;
• credible and impartial judicial enforcement;
• clear distinction between regulators and regulated;
• well-resourced, inquisitive and independent media;
How do Countries Score?
Philippines
80.0
Hong Kong
60.0
Indonesia
40.0
Singapore
Thailand
20.0
0.0
New Zealand
Korea
USA
Malaysia
Australia
Convertibility Index
Correlation between Corporate Governance and
Capital Account Convertibility
100.0
90.0
80.0
70.0
60.0
Thailand
50.0 Philippines
40.0
Indonesia
30.0
20.0
20.0
30.0
40.0
Malaysia
Korea
50.0
Corporate Governance Index
60.0
70.0
Global Competitiveness Report
Correlation between two Measurements of Capital
Account Convertibility
7.00
6.00
5.00
4.00
3.00
2.00
20.0
30.0
40.0
50.0
ADB Analysis
60.0
70.0
80.0
Global Competitiveness Report
Correlation between two Measurements of Capital
Account Convertibility
7.00
6.50
6.00
5.50
5.00
4.50
4.00
20.0
40.0
60.0
ADB Analysis
80.0
100.0
The Three Major Sins
in Asia’s Sharemarkets
• Misuse of rights issues;
• dumping of assets by controlling
shareholders;
• trading with related parties;
Share Price Manipulation
in Asia’s Sharemarkets
• Share ramping;
• share pooling;
• share churning;
• share cornering
Ownership Concentration
Percent of Total Outstanding Shares Owned by
Largest Five Shareholders
(November 1999)
Countries
Percent of Total
Outstanding
Shares
Held by Largest
Five Shareholders
67.5%
Indonesia
38.1%
Korea
58.8%
Malaysia
65.3%
Philippines
56.6%
Thailand
At YearEnd
1997
1998
1998
1997
1997
Companies
Reviewed
All listed cos.
Sample of 81 listed
All listed cos.
Listed Non-financial
All Listed cos.
Source: Country Reports in Asian Development Bank RETA 5802: A Study of Corporate Governance and Financing in
South East Asia, Draft Final Report November 1999.
Failure of Financial System
Estimated Cost of Financial Crisis
(% of 1998 GDP)
Estimated cost of bank
recap
(% of 1999 GDP)
Liquidity Support for Financial
Institutions (outstanding 6/99)
Indonesia
Korea
Malaysia
32-37% of GDP
21-28% of GDP
16-23% of GDP
Thailand
30-39% of GDP
160 trillion rupiah
1 trillion won
n.a. (support at peak: 35
billion ringgit)
983 billion baht (excl. debtequity conversions)
Source: World Bank, Asian Growth and Recovery Initiative Report April 1999, ADB updates
III. Rationale for ADB
Involvement in Privatization
Cost of SOEs for Tax Payers
Government Cashflow Position Versus 22 SOEs
(in million Rupiahs)
1995
Dividends Received
1996
1,081
854
11
17
1,092
871
Capital Outlays
(7,725)
(2,997)
Net Transfer to
Government
(6,633)
(2,126)
513
(3,459)
(7,146)
($3,177)
(5,585)
($2,385)
Other Income
Total Income
Price Support to SOEs
Total Cashflow
(US$ million equivalent)
Source: World Bank
Overall, the costs of holding on to the portfolio of
SOEs are Rp34 trillion per annum:
• The opportunity cost of capital as measured by EVA amounts to Rp20
trillion per annum in the foreseeable future.
• The past practice of two-step loans will burden the state budget with
at least Rp11 trillion per year during the next decade.
• The direct costs of non-performing loans from MOF to individual
SOEs is estimated to amount to Rp3 trillion annually.
• The cost of future debt to equity swaps, loan foregiveness in the
context of IBRA debt restructurings, and liquidations is not yet
known.
This total cost of Rp34 trillion is equal to:
• four times the expenditure for housing and
human settlement,
• five times the expenditure for education,
• eight times the health expenditure, and
• the income of the poorest 9% of the population
IV. ADB
Approach to
Privatization
Privatization and
SOE Restructuring
The ADB’s approach in one of radical
transformation of the SOE accompanied by
deregulation and opening of the operational
environment, allowing a clean privatization
which achieves a fair price for the asset.
The key points of ADB’s philosophy are:
Privatization and
SOE Restructuring
• Transforming government enterprise
through corporatization involves making the
ownership form and the competitive
environment of SOEs similar to privately
owned enterprise.
Privatization and
SOE Restructuring
 Privatization programs are guided by a
blend of ideas from modern theories of the
economics of organization and institutional
design including property rights theory,
transaction costs economics, and agency
theory.
Privatization and
SOE Restructuring
• Deregulation to allow competitors to enter
markets is a big driver of strategic,
organizational and cultural change and
improved performance in the SOEs.
Changes in the competitive environment
have to be introduced before or parallel to
corporatization, to reduce uncertainty in
planning for privatization.
Privatization and
SOE Restructuring
• Clear separation of commercial activities
from policy, regulatory, and social functions
is critical in establishing accountability and
improving performance.
Privatization and
SOE Restructuring
• SOEs need to be given clear commercial
objectives and performance targets with the
ability of the bureaucracy (including
politicians) to get involved in day-to-day
management tightly restricted.
Privatization and
SOE Restructuring
• Comprehensive industry, institutional and
organizational reviews prior and during
corporatization are useful for developing a
coherent privatization plan and avoiding
transaction problems.
Privatization and
SOE Restructuring
• Influences to be dealt with during
transformation or corporatization include
pre-transition conditions, preparatory
mechanisms, the competitive environment,
and agency and governance mechanism.
Privatization and
SOE Restructuring
• Thorough reorganization of the SOE is
critical. This includes defining core
businesses and strategies, aligning the
organization design with the new strategic
directions and improving employment
systems.
Privatization and
SOE Restructuring
• Transformational change is best carried out rapidly
rather than in an evolutionary manner. However,
rapid and effective organizational and cultural
change requires leadership skills and clarity of
vision, management synergy, appropriate
organizational structures, the reform of work
practices and incentive and reward systems, explicit
cultural change programs, and a structured and
sustained investment in management and staff
training and development.
Privatization and
SOE Restructuring
Within this framework, privatization can then be
viewed as a means of further economizing and
locking in future gains by strengthening incentives,
opening up access to capital, and subjecting stock
exchange listed companies to equity market
disciplines, including the market for corporate
control.