Executive Yuan (the cabinet), was asked to look at the feasibility of merging ... Fire&Marine Insurance Co. 1997-98. 2'. 100. 30.1. Taiwan Life Insurance Co.
DAVID PARKER
INERTIA IN THE IMPLEMENTATION OF A PRIVATISATION PROGRAMME The case ofpolicy transfer in Taiwan
1. INTRODUCTION'
Today more than 100 countries claim to have privatisation programmes and the year 199912000 saw the largest value of global state asset sales so far, breaking the previous annual record figure ofUS$160bn.. At the same time, in a number of these countries privatisation seems to have been more talked about than carried out (e.g. Cooke & Minogue, 1990; Adam et al., 1992, p.39; Astbury, 1996; Fundanga & Mwaba, 1997). Of the privatisation proceeds in 199912000, Western Europe was responsible for 53%. By contrast, Latin America and Asia accounted for 15% each and the whole of the Middle East and Africa for a mere 2% (Privatisation International, October 2000, no.145, p.7). This study discusses the privatisation programme in Taiwan in the light of the literature on policy transfer detailed in earlier chapters. In particular, this study of Taiwan argues that countries evaluate national policies based on international experience to assess appropriate best practice; and confirms the argument that international policies are usually copied only after adjustment and reorientation. In understanding how Taiwan assimilates policies from overseas, national cultural values and the structure of government are important, as stressed in Chapter 3, as is political power, discussed particularly in the chapters on the experiences in Moscow and London. The chapter begins by quickly reviewing the key issues in policy transfer that are relevant to understanding the Taiwanese experience. The discussion then turns to a detailed review of Taiwan's privatisation programme. The chapter ends with some conclusions relevant to the theory and practice of institutional transplantation. 2. POLICY TRANSFER AND PRIVATISATION As explained in the earlier chapters in this volume, policy transfer is the process by which a country imports policies and programmes from another country or countries (Bennett, 1992; Dolowitz & Marsh, 1996, 1997). Transfer needs to be seen in terms of a wider economic, social and political 'globalisation', in which both values and policies transfer from the industrial economies of North America and Europe to the rest of the world. In this transfer process, policies are justified in terms of perceived 153 M. De Jong, K. Lalenis & V. Mamadouh (eds.), Institutional Transplantation, 153-168
© 2002 Academic Publishers.
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social and economic need and are supported by fashionable economic theories and 'western' experience. Looking specifically at privatisation, the chief model in the 1980s was the UK's privatisation programme. But in the 1990s countries could look for inspiration to a much larger number of countries pursuing privatisation, including countries in Asia such as Malaysia, Indonesia, Thailand, the Philippines and even (mainland) China. International bodies, in particular the IMF and World Bank, have been enthusiastic apostles of privatisation, providing a privatisation model that draws from theoretical economics (notably agency and public choice theories; Vickers & Yarrow, 1988; Martin & Parker, 1997, ch.1) and empirical evidence (including the UK's privatisation). Privatisation is usually justified by appeal to one or more of the following benefits: (1) improving economic efficiency; (2) reducing government borrowing; (3) reducing government involvement in enterprise decision making; (4) easing problems of public sector pay; (5) widening share ownership; (6) encouraging employee share ownership; and (7) gaining political advantage (Vickers & Yarrow, 1988, p.157). However, which of these arguments proves decisive can be expected to vary depending on local circumstances. Some of the arguments may not apply at all. One expected result is different forms of policy, possibly extending to different interpretations of the whole meaning of the term privatisation. In other words, policy transfer should not be viewed simply as a posting of policy from one country to another. Instead, it needs to be seen in terms of the acceptability of the policy in each host country and the way in which each country interprets and operationalises the policy. In the case of Taiwan, early interest in privatisation at government level was based particularly on raising additional revenues for government investment, providing additional investment channels for private capital, relieving inflationary pressures, as well as increasing economic efficiency. More recently the policy goals have been amended to emphasise 'adjusting the role of government to less involvement in the market' and 'building competition across all industries' to promote allocative efficiency (CEPD, 2000). Privatisation involves a multi-stage process from establishing an appropriate administration for privatisation through to completing the sale, in which there is ample scope for one or more interests to disrupt, amend or even reverse the privatisation plans. To minimise the possibility that a privatisation will collapse, the domestic champions of the policy need to create and maintain political support, both within government and outside, perhaps in the face of strong resistance from those interests which expect to be disadvantaged, such as workers, trade unions and politicians who use state enterprises for political patronage. In particular, why should politicians, government officials and state-owned enterprise managers give up the rents they are said to earn from state ownership? In practice, there is likely to be an innate tension within any privatisation programme between the forces of change and those opposed to change, with the latter willing to invest resources up to the value of the rents they receive from state ownership in opposition. Equally, those who may gain rents from privatisation, for example bankers and perhaps some management, can be expected to invest in support of privatisation resources up to the value of their expected rents. 2 Politicians may voice support for the 'principle' of
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privatisation while acting to stall or even reverse the implementation of particular privatisations. The next section of the paper considers state ownership and privatisation in Taiwan in the light of the policy transfer literature. 3. STATE OWNERSHIP AND PRIVATISAnON IN TAIWAN When the Kuomintang (KMT or Nationalist Party) under Chiang Kai-shek fled from the mainland and arrived in Taiwan in 1949 it found a local economy dislocated by Japanese occupation and the civil war. In the following years the KMT ruled with a heavy hand, enforcing press censorship and dismissing demands for democratic elections. Since 1987, however, martial law has been lifted and the first democratic elections have taken place. Taiwan now has a parliamentary-style democracy headed by an elected president; the first presidential elections took place in 1996. In the March 2000 elections, for the first time the KMT was replaced as the party of government by the Democratic Progressive Party (DPP). In 1945 the Chinese state took over enterprises owned by the Japanese in Taiwan. This meant that there were already a number of state-owned enterprises (SOEs) when the new government was founded in 1949. In the following years, under the 'Principle of the People's Livelihood', further SOEs were established in a broad range of sectors, including agriculture, fisheries, mining, manufacturing, water, construction, transportation, electric power, petroleum, banking, posts, telecommunications and insurance. These industries were nurtured by protecting their markets from both domestic and foreign competition. Two broad types of state ownership developed. One type involved operation and control directly by government department, major examples are the Directorate General of Posts and the Directorate General of Telecommunications. The other type involved the establishment of state-owned enterprises (companies and corporations) wholly or mainly central or local government owned. By the early 1990s Taiwan had 80 major SOEs, 25 of which were under central and 55 under provincial or local government control (Huang, 1995, p.46). The number of SOEs including smaller enterprises totalled around 150 (Schive, 1995, p.21). From the 1950s Taiwan succeeded in transforming its economy from agriculture to heavy industry and more recently to lighter, high-technology industries and services. In the forty years from 1954 the country enjoyed an annual GDP growth averaging 8.6%, and state enterprises played a leading role in Taiwan's industrialisation, both directly and in terms of encouraging the growth of the private sector. The economic contribution of the SOEs was especially important before the 1970s; for example state firms accounted for 29.1 % of total gross domestic capital formation in 1951 and 35.2% in 1961. By 1996 the figure had declined to 13.3% and by 2000 to 9.8%. A similar trend is evident in the contribution of state industries to industry value added. For example, state enterprises accounted for 46.2% of industrial value added in 1951, 20.5% in 1961 and a smaller 15.6% by 1996. This decline in the relative importance of SOEs in the economy was caused, not by any run-down in state enterprises, but by the rapid rise of the private sector.
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A number of the SOEs have succeeded internationally and many have made and continue to make healthy profits. They have also been important contributors to government finances; for example in 1971 their surpluses accounted for 10.5% of government net revenues. This has since fallen, reflecting increased revenues from the private sector. Nevertheless, of government receipts in 2000, the surpluses from state firms still accounted for around 8%. Examples of especially successful state enterprises include the China Steel Corporation (CSC), established in 1971, privatised in 1995 and now amongst the 16 largest steel makers in the world, and the Chinese Petroleum Corporation (CPC). In 1994, before privatisation, CPC had an output equivalent to 5% of the country's GNP, making it Taiwan's biggest enterprise. However, in spite of such successes, the perception has grown in certain parts of the government and sections of the business community that the performance of the SOEs would be improved under private ownership. Privatisation in Taiwan can be traced back to the early 1950s and a short-term programme driven by budgetary pressures at a time of land reform. Later, in 1964, the government decided to sell additional shares in state enterprises to assist the development of the stock market. However, a sharp fall in stock prices at the end of that year forced the government to repurchase the shares and public interest in further sales subsided (Huang, 1995, p.47). In the 1970s the Government invested heavily in basic industries, such as steel, shipbuilding and petrochemicals. Although the Government intended that private investors should supplement public funding, especially in the steel and shipbuilding sectors, the private sector showed little interest and the state was left to complete the projects (Schive, 1995, p.23). As a result of continuing state investment, the share of the SOEs in GDP and capital formation remained almost constant during the 1970s; this in spite of the rapid growth of the private sector. But the world oil crisis triggered by the operations of the OPEC cartel had begun to impact on some of the SOEs. As a consequence, the Council for Economic Planning and Development (CEPD) in the Ministry of Economic Affairs, the highest economic consultancy body in the Executive Yuan (the cabinet), was asked to look at the feasibility of merging SOEs. It was also asked to consider the potential for asset sales. But whereas a series of reform measures for state enterprises involving both merger and liquidation occurred in the early to mid-1980s, no privatisations resulted. The reason was a lack of interest in privatisation within government and outside. The brief given to the CEPD emphasised the promotion of mergers within the state sector. In 1984 a prolonged recession led the Government to set up an 'Economic Reform Committee'. After deliberation the Committee called for a number of changes, including a reduction in the size of the public sector in terms of assets and output. But once again little was done. Indeed, the fITst really significant step towards privatisation of the SOEs did not occur until July 1989, when the 'Ad Hoc Committee for Promoting Privatisation' was established. The aim of the Committee was to raise interest in privatisation within the government. Included in it were the Sectoral Planning Department of the CEPD, the Commission of National Corporations of the Ministry of Economic Affairs and the Securities and Exchange Commission. 3 The Committee was given four main responsibilities: (1) to formulate an implementation plan for the privatisation of state enterprises; (2) to revise laws or
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draft new laws and regulations necessary to achieve a smooth privatisation; (3) to oversee the privatisation implementation process; and (4) to consider problems and provide solutions during the course of any privatisation. Table 1: Privatisations in Taiwan, 1989-2001 Enterprise
Time period
No.oftranches in sale & method of sale'
Original state share holding %
Remaining state share holding by
2001
% Central Government 97.6 China Steel 1989-95 40.7 6 1991-94 CPDC 2 direct placement 100 16.2 BES Engineering Co. 1992-94 2 direct placement 99.9 0 Yang-Ming Marine Transport Co. 1992-96 99.9 43.5 3 China Insurance Co. 1993-94 2 99.9 30.7 LP-Gas Supply Administration 1996 1 asset sale 100 0 TMMC: 1 direct placement Tin plate plant 1996 Shipbuilding plant 1 asset sale 1997 Alloy Steel plant 1997 1 asset sale Veterans Gas Manufactory 1998 1 joint venture 100 40.0 2 Kang-Shan Ropery Factory 1 asset sale 1998 Taiwan Fertiliser Co. 1 !PO 88.6 44.6 1999 Farmers' Bank ofChma 1999 2IPO 76.8 45.1 1IPO 75.4 36.0 Chiao Tung Bank 1999 67.3 48.9 Bank of Kaohsiung 1999 1IPO Taipei Bank 1IPO 70.5 45.2 1999 Taiwan Hsin Sheng Press Co. 2000 Taiwan Motor Transport Co. 1 employee buy-out 2001 100 0 2001 Chun!!Hsin Pal!er Manufact. Co. 100 0 1 eml!lo~ee bu~ out Local Government Chang Hwa Commercial Bank 1991-98 2 57.7 30.7 First Commercial Bank 1991-98 2 76.1 40.9 Hua-Nan Commercial Bank 1991-98 62.5 2 41.4 Taiwan Navigation Co. 1IPO 100 39.1 1998 Taiwan Business Bank 1997-98 2 100 41.0 2' Taiw. Fire&Marine Insurance Co. 1997-98 100 30.1 Taiwan Life Insurance Co. 2' 1997-98 100 31.9 Taiwan Devlopement Co. 1998 1 100 36.7 Taipei City Government Printing 2000 1 asset sale House Source: CEPD. I Method of sale was by share trading except where otherwise stated. IPO=Initial Public Offering. In addition to the sales listed here, the state's share holding in the International Commercial Bank of China was reduced from 38.8% to 21.1 % through a share sale in 1992. CPDC = China Petrochemicals Development Co.; TMMC = Taiwan Machinery Manufacturing Corporation. 'In these cases assets were sold and therefore, technically, there was no 'original state share holding'. The assets were 100% state owned before privatisation. 'IPO in September 1997 followed by a share sale during 1998.
Two months after the setting up of the Committee the existing 'Statute for the Privatisation of State Owned Enterprises' was under review and initially 19, later
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raised to 22, SOEs were placed on a priority list for transfer to the private sector. In June 1991 the government completed the revision of the Statute and in February 1992 instituted 'Enforcement Rules', which set out guidelines for the implementation of privatisation. It seemed that progress was being made. By this time, however, a new chairperson had been appointed at the CEPD, Dr. Shirley Kuo. She preferred each ministry responsible for SOEs to be in charge of promoting its own privatisations and the Ad Hoc Committee stopped convening. Following the suspension of the Committee responsibility for planning privatisations devolved to the individual government agencies responsible for particular industries; although the CEPD remained responsible for setting the objectives of the privatisation programme, formulating a 'master plan', revising statutes and formulating regulations where necessary. In July 1993 the number of SOEs slated for privatisation was raised again from 22 to 33, as part of an 'Economic Revitalisation Programme', aimed at seeing Taiwan over an economic slowdown. A speeding-up of the privatisation and liberalisation of the oil and electricity sectors in Taiwan was included. On several occasions such as this one, the government signalled official backing for privatisation, but the first transfer of majority control of an enterprise to the private sector did not occur until May 1994. By the end of 1996, only seven state-owned firms had been transferred by selling shares, through private direct placements or asset sales. This compares with the earlier plan to sell 22 enterprises by 1996. Amongst the firms sold were China Steel, representing Taiwan's biggest and most successful privatisation to date. Table I provides details of the companies sold and Table 2 the amounts raised through privatisation sales each year between 1991 and 2001. Both tables confirm the modest pace of privatisation in terms of the earlier plan, especially pre-l 997. The slow pace of change in Taiwan is evident in the planned reforms for electricity power and telecommunications - both sectors have been subject to privatisations worldwide. It might be expected that the mimetic effect within policy transfer would be at their sharpest in these sectors. The Taiwanese electricity industry, however, is still dominated by the state-run and vertically integrated Taiwan Power Company, despite the fact that plans for reform can be traced back to 1988 with the announcement of measures to promote co-generation. It was only in August 1995 that the first batch of seven private power producers (PPPs) was announced by the Ministry of Economic Affairs. Later that year a further four PPPs were authorised (Hsu, 1996). Plans to privatise the state-owned Taipower continue to be drawn up and then shelved. Turning to telecommunications, in February 1996 a new Telecommunications Act was passed and the government embarked on the first stage of a medium-term privatisation plan. This involved corporatisation of the commercial arm of the Directorate General of Communications (DGT), to create Chung-Hwa Telecom Co .. The CEPD intended that the privatisation of Taiwan's telecommunications should be completed by 2001 (Hsieh, 1996), but in common with the remainder of Taiwan's privatisation programme progress has been frustratingly slow. In 2000 Chung-Hwa Telcom intended to sell 3% of its equity by competitive bidding, 6% through an IPO (initial public share offering) and 12% by an ADR (American depository receipt)4. However, the result was a fiasco with only
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159
2.86% of the stock rmding buyers and the ADR being postponed in the face of falling telecom stock prices worldwide. Table 2: Privatisation proceeds: State enterprises and assets, 1989-2001 Year
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Total
Proceeds
(US$ million)
285 43 351 1,420 167 1,075 1,533 412 8
4,624 2,182 21
112
12,283
Source: CEPD. Note: figure for 1991 includes US$46m raised by the sale of 4.7% of the shares in each of three state banks owned by the Provincial Government (see Table 1).
In addition to the privatisation by central government, Taiwan's Provincial
Government (PG) in 1991 had been involved in three minor share sales involving commercial banks, but these did not evolve into full privatisation. The reason for this is that the Provincial Assembly relied on the state banks for soft loans and passed legislation to prevent the state's share holding falling below 51%. In other areas the PG was also reluctant to sell any of its enterprises. It controlled 33 enterprises identified as candidates for privatisation by the CEPD, but immediately designated six as unsuitable for sale and a further seven 'unsuitable for sale at the present time'. Moreover, there was little or no progress in selling the other 20. In July 1997, however, following a constitutional reform, the PG was streamlined and its affiliated SOEs were taken over by the central government. Subsequently, the central government advanced the privatisation of banks, insurance companies, the Taiwan Navigation Company and the Taiwan Development Corporation owned by the PG (Table 1). In December 1998 legislation took effect that transferred all remaining Provincial Government enterprises to the central government and began the phasing out of provincial-level government in Taiwan. By 1996 only a small number of Taiwan's SOEs had been affected by the privatisation programme. In rnid-1996 the privatisation Ad Hoc Committee was reconstituted to revitalise the programme. 5 The committee completed a review and set a timetable for the sale of 47 SOEs by 2002. In spite of these ambitious plans, however, actual sales continued to be slow. For example, of 15 enterprises slated for sale in the plan between December 1997 and December 1998 only six were actually
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sold in that period. Also, to date the sales have mainly involved enterprises that are successful and profitable. Privatising loss-making enterprises is proving far more difficult. If these companies are to be made attractive to private investors they need to be restructured and this faces strong opposition from workers and their unions, and from members of the Legislative Yuan (Parliament) representing constituencies that would be adversely affected. In 1999 the Ad Hoc Committee revised the plan for 1999 to 2002 (see Table 3). Yet by September 2001 only 25 SOEs plus 3 plants had been privatised. There are now plans to privatise a further 22 SOEs by December 2005. In summary, privatisation in Taiwan has progressed more on paper than in fact. Planned privatisations have been subject to repeated postponement (see Table 3 for details). To understand the reasons it is necessary to address the forces of policy inertia in Taiwan. These are discussed below in terms of political, administrative and economic barriers. 4. BARRIERS TO PRIVATISATION IN TAIWAN Political
The most obvious political barrier to the development of a vigorous privatisation programme in Taiwan has been the hesitant support of the two ruling political parties, the KMT and DPP. The lack of political will to push through privatisation and neutralise opposing forces within and outside government and the legislature (as Mrs Thatcher and a number of her closest ministers provided in the UK) is an important explanation of policy inertia in Taiwan. In public, leading politicians approve of the principle of privatisation, if sometimes with qualifications, but this does not carry over sufficiently strongly into active encouragement of the plans. Political impediments to change are evident at a number of the stages of the privatisation process. In particular, drafting and passing the necessary laws to enable privatisation to take place can be a protracted affair. For example, 'The Statute for the Transfer of Government Owned Enterprises' was submitted to the Legislative Yuan in November 1989, promulgated in June 1991 and implemented only in 1992 and 1993 (Schive, 1995, p.26). A revised version was submitted to the Legislative Yuan in mid-1998 and promulgated in late 2000. Such long delays are encouraged by the consultation processes that the CEPD is required to follow, under the privatisation rules established by the government. Also, all proposals to reduce government holdings to less than 50% usually require approval from the Legislative Yuan before implementation. Several privatisation proposals have been blocked by the legislature at the time of the budget review for the share sales.
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Table 3: Planned Privatisations: Government Timetable for the sale of SOEs, as at autumn 1997 and as later revised in 1999 Proposed Company Date of Sale
Assets Position by September 2001
31 Dec 97
Sold
Veterans Gas Manufactory, Pharmaceutical Plant Taiwan Fertilizer Company Farmers Bank of China Taiwan Chung Hsing Paper Corporation 30 June 98 Taiwan Navigation Co. Taiwan Life Insurance Co. Kao-Hsiung Ammonium Sukphate Co. Veterans Food Products Factory Veterans Nan-Tsu Abrasive Factory Kang-Shan Ropery Factory 31 Dec 88 Taiwan Development & Trust Corporation Agricultural and Industrial Enterprise Co. Taiwan Film Culture Co. Taiwan Bookstore Chiao Tung Bank 30 Sept 99 Tai-Chung Lumber Processing Factory Bank of Kaohsiung 30 Nov 99 Taipei Bank 31 Dec 99 Taiwan Chung Hsing Paper Corporation Aerospace Industrial Development Corp. Taiwan Film Culture Co. 30 June 00 Veterans Pharmaceutical Plant Taipei Iron Works Tao-Yuan Furniture Factory Taiwan Machinery Corporation Central Reinsurance Corporation 30 Sept 00 Food Products Factory Veterans Plastic Works 31 Dec 00 Taipei City Government Printing House Tang Zong Iron Works Co. Taiwan Tobacco and Wine Board Taiwan Hsin Sheng Press Co. 30 June 01 Taiwan Salt Industrial Corporation China Shipbuilding Corporation Chinese Petroleum Corporation Taiwan Power Co. Chung-Hwa Te1com Co. RSEA Engineering Corporation Taiwan Motor Transport Co. 30 June 02 Taiwan Railway Administration Taiwan Railway Freight Co. Source: CEPD.
Postponed & sold later Postponed & sold later Postponed & sold later Sold Sold Sale postponed Sale postponed Postponed & later closed down Sold Sold Postponed Postponed & later closed down Sale postponed - transferred to a govt. dept Sold Closed down Sold Sold Sold Sale postponed Closed down Sale postponed Closed down Sale postponed Sale postponed Sale postponed Sale postponed Sale postponed Sold Sale postponed Sale postponed Sold Sale postponed Sale postponed Sale postponed Sale postponed Sale postponed Sale postponed Sold
In Taiwan state industries are important providers of employment and sources of political patronage and influence. Added to this, the management of SOEs tend to be conservative and have not formed a powerful interest group calling for a change in ownership (one exception is Chinese Petroleum where the threat from market liberalisation led management to favour privatisation). By mid 2001, among the 25
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privatised SOEs government still owned major stakes in 18. The average state shareholding had dropped to 36% of the equity, but the appointment of 60% of the board members was still controlled by government (see Table 4 for details). Politicians like to retain some influence in the businesses and this seems not to be strongly opposed and may even be welcomed by management. Some SOE managers are close to retirement and fear for their positions under private ownership. Younger managers, especially those in loss-making enterprises, also fear for their jobs. Table 4: Major Privatisations: Continued Government Control through State-Controlled Board Members
Privatised SOE
Date of privatisation
Retained state shareholding
Taipei Bank 99/11130 45.21 9811/22 First Bank 36.52 98/1/22 35.02 Taiwan Business Bank Chiao Tung Bank 99/9/13 36.03 Fanners' Bank of China 99/9/3 45.12 Bank of Kaohsiung 99/9/27 48.86 Hua-Nan Bank 98/1122 38.15 98/111 23.94 Chang-Hwa Bank Yang-Ming Marine 96/2/15 42.62 Transport 94/5/5 30.64 China Insurance Co Taiwan Navigation 98/6/20 27.12 99/9/1 44.57 Taiwan Fertilizer China Steel 95/4/12 40.32 Taiwan Development 99/118 36.71 Co. Taiwan life Insurance 98/6/30 25.44 Veterans Gas 9811/1 39.82 Manufactory Taiwan Fire& Marine 98/1122 28.00 Insurance 15.73 CPDC 94/6/20 Total or average 35.55 Note: CPDC - China Petrochemicals Development Co Source: CEPD.
Market values ofstate shareholdings (NT$ million2
Ratio ofstatecontrolled board members
16,835 29,153 11,462 24,264 7,148 2,324 30,616 11,996
18118
8/20
10,968
7/9
1,506 571 6,028 65,609
7/14 6/9 6110 6/12
405
5112
14/20
14/20
12/20
12/20 11114
10/20
2,214
4/9
NA
4/9
822
3n
1,073 222,993
3112 60%
Alongside insufficient support for privatisation within government and the boards of the SOEs, there has been scepticism amongst the public regarding both the government's motives for privatisation and its likely benefits. There is particular concern that the state may be trying to off-load dud enterprises onto the public, despite the fact that so far share flotations have involved profitable SOEs. When Government first sold shares in several state enterprises in 1964, investors suffered losses after share prices plurnmeted. Privatisation has also been tamished by the Core Pacific Securities scandal, discussed below. In other words, privatisation is not an obvious vote winner.
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Administrative
Along with the political impediments to privatisation, a lengthy administrative process in Taiwan forms an effective barrier to speedy privatisation. The responsible agencies submit their proposals for privatisations, which are then reviewed by the CEPD. The Ad Hoc Committee co-ordinates the privatisation schedules and submits its proposals to the Executive for approval. The next stage within government is to agree the company's privatisation plan and determine the offer price. The offer price is determined by an appraisal committee within government. When the committee has settled on a figure, this is sent for confirmation to the Executive and the Ministry of Audit. On being selected as a possible privatisation candidate, the company is responsible for preparing its own privatisation plan. Some ministries (notably the Ministry of Economic Affairs) have been more active than others in pressing companies to submit their plans. A few government departments, notably the Directorate General of Posts and the Taiwan Railway Administration, have been criticised for not acting quickly enough. Failure to submit effectively postpones privatisation. Even in the case of companies that have submitted plans in a timely fashion, progress is slow because of the process of intra-government consultation. Problems of co-ordination between government departments continue to hamper the privatisation process. Even when a privatisation has been approved by the Executive Yuan, the Legislative Yuan is able to use its authority to block the necessary sale budget. Further delay is caused by the method of share allocation. A common form of privatisation has been a share sale under which investors buy shares at a set flotation price. This price has to be agreed within government and there can be a long time lag between the setting of the price and the first day's trading in the shares. In the case of BES Engineering, it took 64 days for the papers to pass back and forth between the various government departments (Schive, 1995, p.27). In the meantime, there can be sharp price movements in the stock market. As a result of the problems suffered by past offers for sale, the Government has considered share auctions and book building as alternatives. The latter involves taking soundings amongst institutional investors as to the price they would be prepared to pay to buy blocks of shares and has the advantage of reducing uncertainties surrounding the flotation price. However, political propriety and accusations of 'favouritism' mean that, while government officials could negotiate sales with private investors in pursuit of maximum revenue, they are reluctant to do so. Taiwan has experienced particular problems with a number of its public offerings. In the case of one issue of China Steel shares the price quickly fell below the underwriting price, while an issue of BES Engineering shares failed to meet its pre-set target value. Shares in Taiwan Machinery offered for sale by tender in March 1994 failed to generate sufficient interest and the sale had to be aborted. The recent flotation of Chung-Hwa Telecom flopped. The reasons for these failures appear to start with the initial valuation of the companies. Government departments have an incentive to negotiate a high price because this suggests an enterprise successfully
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managed by the department. In addition, it avoids possible public criticism that the assets are being sold too cheaply. Following problems with early flotations, the Ministry of Economic Affairs agreed to direct placement as the best vehicle for disposing of shares in the China Petrochemicals Development Corporation (CPDC) and BES Engineering. Direct placement was promoted by Core Pacific Securities, a Taiwanese investment company. This company subsequently acquired large shareholdings in both companies and then diverted a large proportion of the companies' capital into securities investments. After Core acquired its holding in CPDC in 1994, it invested US$75m. in securities resulting in around US$14m of capital losses. Core's investment in BES provoked the resignation of the company's chairman after the board decided to raise the maximum threshold for securities investments four-fold, to US$440m (or 80% of the company's capital). Following this scandal, the Ministry of Economic Affairs instigated measures to prevent large corporations acquiring control of privatised industries. In sum, the administrative process is lengthy and has been surrounded by controversy. The criteria for selection of candidates for sale by the CEPD is not always clear (Thomas, 1997, p.295). Even when the sale has been agreed between the enterprise, the CEPD, other relevant government departments, the Executive Yuan and the legislature, a politically determined and unrealistic share price can undermine the whole success of the sale. Christopher Hood (1976, p.205) in an extensive study of administration concluded that administration is seldom the critical limit on policy outcomes. This may be true; but in Taiwan the administrative process interrelates with the political and economic forces detailed here to create formidable inertia in policy formulation and more especially implementation. In November 2000 a revised 'Statute for Transforming Government-operated Enterprises into Private Enterprises' was approved by the legislature aimed, once again, at speeding up the privatisation process by reducing bureaucratic impediments. Time will tell whether this new law is any more successful than previous measures. Economic
There are three particular economic barriers to privatisation in Taiwan. The first concerns economic success. The performance of the economy and the success of a number of the state enterprises have removed the need to reform the state sector. In the UK, SOEs were seen as part of the cause of economic failure, but no such argument arises in the case of Taiwan because the economy has been highly successful. In the past, a need to privatise has been absent; although government officials now argue that budgetary pressures caused by rising social welfare payments and the recent economic slowdown in East Asia necessitate asset sales to generate adequate government revenues. The second economic barrier concerns Taiwan's capital market. The cautious pace of privatisation sales is influenced by fear that the country's capital market is incapable of absorbing large share issues. One response has been privatisation by sale of shares in tranches. Another possible solution, encouraging foreign
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investment, has come up against resistance in Taiwan to the ownership of major industries by foreigners. The government recognises that opening up the country to foreign capital inflows (and outflows) is part and parcel of liberalising an economy, but foreign investment in privatised companies has been restricted by government and stock exchange rules (Hsu, 1996). In mid-October 1997 the foreign investment ceiling was belatedly lifted and now a single foreign investor is allowed to invest in up to 15% of the shares of a listed company on the Taiwan stock market and the total foreign investment in a listed company can now be as high as 30%. Prior to this change, the comparable percentages were 10% and 25%. In the case of the UK around 15% of shares in privatised companies were sold to foreigners and the figure is as high as 67% in the case of New Zealand and 97% for Mexico's privatisations. The comparable figure for Taiwan is less than 5% with the third tranche of shares in China Steel in 1992 the only sale until the late 1990s in which foreigners were actually encouraged to take part. In this case there was a simultaneous issue of ADRs and other depository receipts worldwide alongside a domestic share issue. In 1994 the Legislative Yuan refused to approve a further depository receipt issue for China Steel shares. The third barrier is labour hostility. Privatisation is strongly opposed by the trade unions in Taiwan, which have grown in power since the late 1980s' democratic reforms. Strikes and demonstrations are common and the threat of social unrest, at a time when political democracy is still in its infancy and its robustness untested, weighs heavily within government. When in June 1995 the Government sold assets of the Taiwan Machine Manufacturing Corporation, the police had to be called in to clear the factory gates. While some in the government would like to see the lossmaking state enterprises closed down if they cannot be sold, labour opposition has been influential in ensuring that the government is reluctant to follow this path. After the election of the new DPP government in March 2000, at a time of general economic slow down and rising unemployment, the new Minister of Economic Affairs announced a slowing of privatisations to provide time for an internal review of the programme, including the consequences of closure plans. To reduce labour's opposition, priority share schemes6 and generous compensation terms have been built into the privatisation programme. Shares are usually offered on preferential terms to employees; while all staff are compensated for losses under the labour insurance scheme. Those who choose to leave at the time of privatisation or are laid off within five years after privatisation are entitled to severance compensation equivalent to seven months' pay. The company meets the costs of resettling labour and the labour insurance compensation. These payments can impose a serious financial burden on privatised companies 7 and are thought to have been a major obstacle to some sales; while it is estirnated that around 20% of potential privatisation receipts are utilised for employee compensation. At the same time, most public enterprise employees feel that their employment conditions and job security will be worsened by privatisation. This fear is justified; in 2000 the average monthly salary in public enterprises was over twice as high as in the private sector, while weekly hours of work were much lower. Most proposed privatisations can expect to meet with street demonstrations as well as with parliamentary interference because of lobbying by trade unions.
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In addition to selling state enterprises Taiwan is pursuing market liberalisation policies and using contracting out and management contracts for public services, such as garbage collection, waste disposal, traffic administration and hospital administration. 8 In this sense, Taiwan appears to be directly modelling its policies on the policies pursued in other countries, with Mrs Thatcher's privatisation programme in the UK having proved influential in the 1980s and early 1990s, but with the experiences of other countries, including Asian countries, also proving important since. The UK has exported its model of privatisation internationally through consultancies and international bodies such as the IMF and World Bank and officials in the CEPD have been influenced by its reported success in raising the UK's economic performance. But as Peter Evans has written '.... exogenous inspirations .... build on indigenous institutional foundations ... ' (Evans, 1995, p.243). Taiwan's case illustrates how policies are transferred imperfectly from one country to another and how they can face considerable policy inertia (Dolowitz & Marsh, 2000). While privatisation has been official policy for over a decade, by September 2001 only 25 SOEs and three plants of another SOE had been transferred to the private sector, yielding total proceeds ofUS$12.2bn..9 Progress following a change of government in May 2000, has been especially slow with only four SOEs sold by the autumn of 2001, yielding less than US$2m.. As a recent document from the CEPD comments: the path of privatisation in Taiwan 'has been littered with obstacles, thrown in the way by legislative and administrative institutions, the financial market, labour unions, and vested interests' (CEPD, 2001). Within Taiwan the CEPD and the Ad Hoc Committee are responsible for planning the sale of SOEs. But the CEPD has lacked consistent support from the rest of the government and the ruling party. In addition, privatisation faces suspicion from SOE management and the general public and outright opposition from workers. Several institutional deterrents to privatisation exist in Taiwan, notably the legislative and administrative institutions, the division between central and provincial governments (relevant before the recent constitutional reforms) and perceived inadequacies (real or imagined) of the domestic capital market. Also, although Taiwan's economic success has created an elite within Taiwan who have derived their wealth predominantly from private capital, and this elite may favour privatisation in principle, continued economic success has meant a lack of political momentum to push through privatisation in the face of opposition. Privatisation is occurring in a number of countries, but as Taiwan's experience illustrates, institutional transplantation is embedded within each country's peculiar political, administrative and economic conditions. The difficulties facing privatisation in Taiwan seem not dissimilar to problems faced in other countries, such as India, China and many African countries, where powerful institutional forces act as a barrier to change. In other words, a theory of institutional transplantation needs to respect the particular conditions that exist in each country. Culturally Taiwan is a mixture of Western and Eastern influences; for example, it still reflects Confucian values notably respect for social conventions and patrimony. In Taiwan the privatisation programme is based on consensus building, but in a
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context where it has proved difficult to negotiate change both within and outside the political and administrative structures. NOTES I I would like to thank officials within the Council for Economic Planning and Development in Taipei, especially, Hsueh-Llang Wu, for providing information on Taiwan's privatisation programme and commenting on an earlier version of this chapter. The usual disclaimer applies. An earlier study of mine appeared in the Asia Pacific Business Review, vol.6, no.2, pp.I-20, under the title 'Policy Transfer and Policy Inertia: Privatization in Taiwan'. I would like to thank the editor for allowing me to use some of the material from that paper in this chapter. 2 Technically, in both cases it will be the discounted value of the rents since the rents are earned over time. 3 The Department of National Treasury of the Ministry of Finance joined the Committee in 1998. • ADRs are American Depository Receipts. These are certificates of ownership issued to investors by a US bank, which holds (on deposit) the investors' stocks and shares. 5 Now referred to as The Steering Committee for Promoting Privatisation of State-owned Enterprises. 6 Employees were initially entitled to buy priority shares equal in value up to 24 months' pay; this was later increased to 48 months. 7 The cost is a particular problem when the privatisation of loss-making enterprises is contemplated. In 2000 a privatisation fund was established within government to help provide state enterprises in poor financial condition with the means to compensate their employees. 8 At the time of writing there was also a bill before the Taiwanese legislature designed to encourage private sector investment in infrastructure schemes using build-operate-transfer (BOT) and similar schemes adopted elsewhere. 9 In addition, 14 small-scale factories had been closed down.
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