Privatization in Asia by Dr. KlausPeter Kriegsmann Bali, 11 May 2000

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Privatization in AsiabyDr. Klaus-Peter
KriegsmannBali, 11 May 2000
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I. HISTORYII. CORPORATE ENVIRONMENTIII. ADB
INVOLVEMENT
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I. HISTORY
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II. CORPORATE ENVIRONMENT
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Institutional EconomicsPrerequisites 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

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The Three Major Sinsin Asias Sharemarkets

• Misuse of rights issues
• dumping of assets by controlling shareholders
• trading with related parties

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Share Price Manipulationin Asias Sharemarkets

• Share ramping
• share pooling
• share churning
• share cornering

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Ownership Concentration
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Failure of Financial System
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III. Rationale for ADB Involvement in
Privatization
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Cost of SOEs for Tax Payers
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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.

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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

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IV. ADB Approach to Privatization
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Privatization and SOE Restructuring

• The ADBs 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 ADBs philosophy are

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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.

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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.

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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.

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Privatization and SOE Restructuring

• Clear separation of commercial activities from
  policy, regulatory, and social functions is
  critical in establishing accountability and
  improving performance.

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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.

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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.

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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.

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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.

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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.

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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.