Corporatisation and State Enterprise Restructuring (Dr. Christopher Gan)

1. Corporatisation and State Enterprise Restructuring • (Dr. Christopher Gan)

2. 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

3. 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

4. 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

5. 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

6. 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.

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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.

13. 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

14. 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.

15. 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

16. 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

17. 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

18. 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

19. 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

20. 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

21. 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

22. 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

23. 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

24. 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.”)