Privatization in Asia by Dr KlausPeter Kriegsmann Bali

Privatization in Asia by Dr. Klaus-Peter Kriegsmann Bali, 11 May 2000

I. HISTORY II. CORPORATE ENVIRONMENT III. ADB INVOLVEMENT

I. HISTORY

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;

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

Failure of Financial System

III. Rationale for ADB Involvement in Privatization

Cost of SOEs for Tax Payers

Overall, the costs of holding on to the portfolio of SOEs are Rp 34 trillion per annum: • The opportunity cost of capital as measured by EVA amounts to Rp 20 trillion per annum in the foreseeable future. • The past practice of two-step loans will burden the state budget with at least Rp 11 trillion per year during the next decade. • The direct costs of non-performing loans from MOF to individual SOEs is estimated to amount to Rp 3 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 Rp 34 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.