Corporatisation and State Enterprise

Restructuring

(Dr. Christopher Gan)

Corporatisation and State Enterprise Restructuring – Why?

Government worldwide have become increasingly cash strapped, largely due to growing demands on Treasury resources to finance the various services and programmes for which the State has traditionally tended to be responsible, including for example, health, welfare and social security programmes

Many agencies find themselves competing with higher profile services in programmes for scarce public funds

Why Corporatise the incumbent SOEs?

To separate regulatory, policy-making and operational functions

To provide greater financial autonomy to the incumbent operator Outside of the government’s annual budget Outside of civil service pay scales Outside of public sector borrowing requirement

To clarify operator’s financial situation To replace ‘profits tax’ with sales tax To create separate pension scheme

To prepare the way for eventual privatisation and sector reform

Why Privatise the Incumbent SOEs?

To introduce fresh investment and/or foreign investment into the Sector To rid company/country of accumulated debts To initiate new network roll-out programme

To introduce new management or technology transfer into the Sector

To create level playing field for other, privately-owned operators in the Sector

To raise capital for government by selling assets

To create obligations and incentives for the incumbent

What is Corporatisation?

Changing the structure of a government or semi-government body so that it operates on business lines, with a mandate to trade profitably and an obligation to account to the government for its financial performance.

Business structures provide stronger incentives for efficiency in pricing, investment and operations, freedom from artificial capital constraints, and a clearer focus on consumer interests rather than the interests of incumbent politicians.

This is often seen as a step towards full-scale privatization

What is Corporatisation?

The effect of corporatization has been to convert state departments into public companies and interpose commercial boards of directors between the shareholding ministers and the management of the enterprises

These state-owned enterprises are organized in the same manner as private corporations, with the difference that the company's shares remain in the ownership of the state and are not traded on the stock market.

Benefits of Corporatisation

Customer’s perspective Stronger customer orientation and increased customer satisfaction Decrease in delays Efficient use of resources

Employee’s perspective Performance-related salary structure

Shareholder’s perspective Relief on the federal budget Value added per year Dividend and profit

Political perspective Transfer of civil servants No subsidies

Corporatisation and State Enterprise Restructuring – Agency Problem

The agency problem occurs when: The desires or goals of the principal and

agent conflict Solution:

Principals engage in incentive-based performance contracts

Monitoring mechanisms such as the board of directors

Enforcement mechanisms, such as the managerial labor market, to mitigate the agency problem

Corporatisation and State Enterprise Restructuring – Agency Problem

Large block shareholders have strong incentive to monitor management closely

May also obtain Board seats, which enhances their ability to monitor effectively (although financial institutions are legally forbidden from directly holding board seats)

Incentive systems do not guarantee that managers make the “right” decisions, but do increase the likelihood that managers will do the things for which

Corporatisation - Challenging and Complex Processes (Board of Directors)

Ensure its independence Guarantee its integrity Expand its room for adding value Allow openness and freedom to reign in board

deliberations Draw the individual talents of each director Give each director a meaningful niche The Board sets the tone for the culture of teamwork

and professionalism

Corporatisation - Challenging and Complex Processes (CEO - Managers)

The CEO and senior management run the corporation on a delegated authority basis

Thus, they have autonomy and discretion

They take initiatives and deploy resources to actively purse operating objectives.

They must enjoy the freedom and independence to produce results.

They are justified in expecting rewards

Corporatisation - Principles

Clear commercial objectives This principle requires the “unbundling”

of conflicting commercial, social, policy, advisory and regulatory functions which the public sectors have often undertaken

Separating these functions and giving the public sector clear commercial objectives provides a direct focus for management and ensures that clear performance targets can be set for the organisation.

Corporatisation - Principles

Appropriate managerial authority and autonomy This involves giving boards of directors and

management greater responsibility and authority for accomplishing the public sector’s objectives within the commercial parameters set by the Government as shareholder

The principle requires that key internal operating decisions are made by Boards and management

Corporatisation - Principles

Effective performance monitoring There must be a rigorous, independent (of the Board

and management) monitoring regime that permits comparative assessment of the public sector’s performance against agreed targets.

Rewards and sanctions on performance A vigorously applied system of rewards and

sanctions must operate in order to effectively promote good commercial performance and to sanction poor performance

Such rewards and sanctions can be achieved in remuneration and employment arrangements, the tightening or relaxing of reporting and monitoring requirements, and liberalising or restricting management’s decision making ability in regard to future investment decisions.

Corporatisation - Principles

Competitive neutrality in input and output markets Any special advantages or disadvantages applying

to the public sectors by virtue of their Government ownership must be removed

Public Sectors are encouraged to be efficient through exposure to competition

The Government has in place explicit policies to level the playing field between public sectors and their competitors

For example, a corporatised entity is required to pay tax at rates equivalent to those of a private company

Public sectors are also required to pay a commercial return to the Government as shareholder on the assets employed in each business

Modern Corporation Has Four Main Attributes

Limited liability for owners Owners’ risk of financial loss limited to

their contribution to the corporation’s capital

Centralized, autonomous management governed by board of directors Firm’s day-to-day affairs conducted by

“managers”, hired by the owners Board of directors, elected by the owners,

represents owners’ interests, giving direction to management and carrying out oversight of managers’ performance

Modern Corporation Has Four Main Attributes

Separate identity Corporation a legal entity distinct from

its owners (“shareholders”), with clear definition and accounting for its assets and liabilities

Transferability of ownership shares Shareholders’ ownership interests

transferable, and share transfer by an owner does not, in itself, change rights and obligations of the corporation with respect to its own assets and liabilities

Corporatisation – Downside

Corporatisation also raises the question of accountability Reduced the public scrutiny that is necessary

to protect the environment Corporatisation is a step in the

commercialisation process, which emphasised financial goals above those of community service and environmental protection

What is more, it has deprived ratepayers of their rights as owners of this public authority by reducing them to the status of customers, whose only recourse is compensation when things go wrong

Corporatisation – Conclusions

Overall Objective of Corporatization and Corporate Governance Reforms is to Make Enterprises Efficient, Profitable and Sustainable

Most transition countries have moved along spectrum of enterprise reform Efficiency

Commercialization => Corporatization => Privatization => Restructuring => Profitability Corporate Governance Agility

Corporatisation – Thailand TOT and CAT

Thailand’s telecommunication sector is transforming from state monopoly to free competition

The sector needs to be fully liberalized by 2006 following Thailand’s commitment to the World Trade Organization (WTO)

The two main state-owned enterprises responsible for providing telecom services comprised of the Telephone Organisation (TOT) and the Communication Authority of Thailand (CAT)

Private sector has taken part in providing telecom services in an early 1990s by being granted BTO (Build-Transfer-Operate) concession contracts mainly from TOT and CAT in response the rapidly growing domestic demands at the time

Corporatisation – Thailand TOT and CAT

To create level playing field, the government realises that the market structure of the telecommunication sector needs to be adjusted

TOT and CAT can no longer hold their regulatory functions (as concessions issuers) as they will become the private operators in the market soon after the process of corporatisation and privatisation has been accomplished

In November 1997, the government approved a “Master Plan for Telecommunications Development”. According to the plan, TOT and CAT were to become private companies through the corporatization and privatization process

All of the concessions contracts that they both held would be converted into licenses

Corporatisation – Thailand TOT and CAT

The privatization process has been delayed for some time due to some regulatory uncertainties on key issues, one of which is the framework of concession contracts conversion scheme

The other is the right business model for TOT and CAT when the two become private companies

Despite some regulatory uncertainties, TOT and CAT were finally corporatized in 2002 and 2003 respectively

The next step for both is to undergo the privatization process

Before TOT and CAT can be privatized, all the concession contracts between the two state owned enterprises and private telecommunication operators have to be converted into licenses

Corporatisation – Thailand TOT and CAT

Benefits Increasing participation from private companies has

brought some competitive element into the markets This phenomenon is obvious especially among the

mobile phones operators and the internet providers As a result, users can benefit from more various

kinds of services with the falling prices from increasing numbers of mobile phone operators

For the mobile phone sector, at the end of 2003, the total number of mobile phone subscribers has reached 22 million people, a 22% increase from the total number of subscribers in 2002

Corporatisation – Thailand TOT and CAT

Benefits Orange, a giant European telecommunication

operator, had expanded its services in Thailand by joining Telecom Asia of the CP Group in order to provide mobile phone services under the new company called TA Orange

It had to compete with the already well-established companies like Advance Info Service and DTAC, the company has still been able to capture 8.2% of the market share within two years after the launch of its services

(Source: Vipada Mavichak, “Telecommunication Sector: Moving towards Free Competition.”)