privatization in asia by dr. klaus-peter kriegsmann bali, 11 may 2000
TRANSCRIPT
Privatization in
Asiaby
Dr. Klaus-Peter KriegsmannBali, 11 May 2000
I. HISTORY
II. CORPORATE ENVIRONMENT
III. ADB INVOLVEMENT
I. HISTORY
Priivatization Revenues in Developing Countries
1990 to 1998
East Asia14%
Latin America
56%
Eastern Europe
14%
CentralAsia7%
SouthAsia4%
Africa5%
Privatization Revenues in Developing Countries
-
10,000
20,000
30,000
40,000
50,000
60,000
70,000
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
Year
US
$
Privatization Revenues in Central Asian Republics
-
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
Year
US
$
Privatization Revenues in South Asia
-
500
1,000
1,500
2,000
2,500
3,000
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
Year
US
$
Privatization Revenues in South-East and East Asia
-
2,000
4,000
6,000
8,000
10,000
12,000
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
Year
US
$
II. CORPORATE ENVIRONMENT
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;
How do Countries Score?
0.0
20.0
40.0
60.0
80.0Philippines
Indonesia
Thailand
Korea
Malaysia
Australia
USA
New Zealand
Singapore
Hong Kong
Correlation between Corporate Governance and Capital Account Convertibility
20.030.040.0
50.060.070.080.0
90.0100.0
20.0 30.0 40.0 50.0 60.0 70.0
Corporate Governance Index
Con
vert
ibil
ity
Inde
x
Malaysia
Korea
Philippines
Indonesia
Thailand
Correlation between two Measurements of Capital Account Convertibility
2.00
3.00
4.00
5.00
6.00
7.00
20.0 30.0 40.0 50.0 60.0 70.0 80.0
ADB Analysis
Glo
bal
Com
peti
tive
nes
s R
epor
t
Correlation between two Measurements of Capital Account Convertibility
4.00
4.50
5.00
5.50
6.00
6.50
7.00
20.0 40.0 60.0 80.0 100.0
ADB Analysis
Glo
bal
Com
peti
tive
nes
s R
epor
t
The Three Major Sinsin Asia’s Sharemarkets
• Misuse of rights issues;
• dumping of assets by controlling shareholders;
• trading with related parties;
Share Price Manipulationin Asia’s Sharemarkets
• Share ramping;
• share pooling;
• share churning;
• share cornering
Ownership Concentration
Percent of Total Outstanding Shares Owned byLargest Five Shareholders
(November 1999)
Countries Percent of TotalOutstandingSharesHeld by LargestFive Shareholders
At Year-End
CompaniesReviewed
Indonesia 67.5% 1997 All listed cos.Korea 38.1% 1998 Sample of 81 listedMalaysia 58.8% 1998 All listed cos.Philippines 65.3% 1997 Listed Non-financialThailand 56.6% 1997 All Listed cos.Source: Country Reports in Asian Development Bank RETA 5802: A Study of Corporate Governance and Financing inSouth East Asia, Draft Final Report November 1999.
Failure of Financial System
Estimated Cost of Financial Crisis(% of 1998 GDP)
Estimated cost of bankrecap
(% of 1999 GDP)
Liquidity Support for FinancialInstitutions (outstanding 6/99)
Indonesia 32-37% of GDP 160 trillion rupiahKorea 21-28% of GDP 1 trillion wonMalaysia 16-23% of GDP n.a. (support at peak: 35
billion ringgit)Thailand 30-39% of GDP 983 billion baht (excl. debt-
equity 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 1996
Dividends Received 1,081 854
Other Income 11 17
Total Income 1,092 871
Capital Outlays (7,725) (2,997)
Net Transfer toGovernment
(6,633) (2,126)
Price Support to SOEs 513 (3,459)
Total Cashflow (7,146) (5,585) (US$ million equivalent) ($3,177) ($2,385)
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.