2022.10 The Taiwan Banker NO.154 / By Ingrid Chang
With the right stage, public companies can shineBanker's Digest
Public stock companies are usually formed with their own background and positioning. Their starting point is a better life for citizens, but after a period of development, the government may improve their performance and service culture by opening up market competition. Many publicly controlled companies have been turned into public stock companies, and then onto private corporations. The market usually assumes that the performance of such companies will suffer due to their historical burdens. But several domestic companies of this type, including Chunghwa Telecom, China Airlines, and even mixed ownership banks, have not only achieved dazzling results over the past few years, but also imbued themselves with a necessary sense of mission. Privatization of public companies was once standard doctrine The history of publicly controlled companies is long, and their scope is even wider. Most started with people’s daily necessities, such as hydro-power, electricity, postal services, railways, aviation, automobiles, steel, and banks, undertaking large national policy missions in order to improve people’s lives, even while losing money. In the 1980s, however, many countries privatized their public companies. Although there were a multitude of reasons, behind most of them was the neo-liberalism that prevailed in that era. British Prime Minister Thatcher and Japanese Prime Minister Yasuhiro Nakasone vigorously privatized state enterprises during their tenures. In 1989, Taiwan established the Executive Yuan Public Sector Privatization Task Force to come up with objectives for privatization. Sinopec, Sinosteel, and Chunghwa Telecom were all privatized over the next 10 years, opening up public shareholding. In 1998, some publicly controlled banks were also privatized. Due to the small scale and large number of banks, privatization of publicly controlled banks in order to improve their profitability was the focus of financial reform in Taiwan. The government aimed to consolidate the market. The purpose of privatization is to increase the autonomy of business operations, strengthen competitiveness, raise financial resources for public construction, absorb excess hot money in the market, and add bargaining chips in global capital markets. These all seem like good ideas, but some privatized companies have not performed as well as expected. Privatization is not a panacea In 1987, Japan Railways was a state-owned company operating Japan National Railways integrating trains and roads. A new company was not set up for the bullet train; rather, it was divided into seven businesses to be operated independently. At the beginning, the Japanese government assisted them by holding controlling stakes, and allowed them to operate in multiple businesses, including travel agencies, restaurants, parking lots, and land development, eventually assisting in their listing. However, Shikoku JR and Hokkaido JR are still state-run due to insufficient traffic. The privatization process was strongly resisted by labor unions. However, the most important thing is for the company after privatization is fully completed is to make profits, and loss-making routes and stations will be reviewed. Although Japan has a mechanism for negotiation with local governments, either JR or private railways will still be questioned for abandoning lines and stations in remote areas, which is a top priority for public transportation. The purpose of privatization was to decentralize ownership and professionalize management rights – not just to open the equity for sale and ignore it. Privatization is not a panacea, so follow-up operations are still the focus. The privatization of British Rail in 1994 was a similarly bumpy process. Vehicles were split from railway lines, and management rights for the lines were split into 102 sections and sold to 25 companies. Subsidies of £100,000 were eventually increased to £700,000, and people demanded that state ownership be restored. Public stocks do not perform worse than private stocks Because of the importance of state-owned companies in national policy and people’s lives, Taiwan’s public stock companies have also adhered to these themes. Academic papers show that public enterprises do not necessarily perform worse than private businesses. Empirical Study on the Lending Differences between Taiwan's Public Equity and Private Banks During the Recession and Financial Crisis (2020) found that unlike private banks, which “borrow umbrellas in sunny days and collect them in rainy days,” public stock banks collect fewer umbrellas during recessions or financial crises, or even continue to increase lending, especially to SMEs. On the whole, lending by Taiwan's public banks has made up for credit crunches by private banks during rainy days, playing a stabilization role in overall capital supply. Their role over the past couple of years has been indispensable. During the pandemic, the government tasked them with designing bailout loans to help livelihoods, and even transformation consulting. They supported and fully participated in government policies, and their profitability last year was also eye-catching. If the government is like a brain, then public stocks banks are like the lifeblood of the economy. Strong blood ensures the success of national policies. Public banks’ focus on information security, green finance, trusts, and digital finance, not only strengthens Taiwan, but also lays a foundation for the future. Financial service practitioners should recall the reason for the existence of public banks. International models There are also many successful cases of publicly owned companies around the world, such as in France, with a long history and a wide range of services including wholly or partially state-operated postal services, telecommunications, railways, electric power, coal mines, aviation, automobiles, steel, banks and insurers. The most famous of these is Renault, which not only manufactures high-quality cars, but also makes strong profits – demonstrating that French state-run business is not inferior to the private sector. Although run by the state, French state-owned businesses do not rely on the government for funding. They do not consider themselves privileged, and still do their best to compete with other private companies. The state-run railway company must still compete with private operators, and the publicly owned Societe Generale not only competes with private banks, but also has two other state-owned rivals. Judging from France’s experience, state-owned companies should shoulder more responsibilities than their private counterparts. However, their executives recall that the original intention of state ownership is to “better the country and society.” State businesses may not necessarily be performance-oriented in the initial stage, but they must ensure high-quality services with good profits in their growth. Therefore, whether a financial institution is publicly owned or publicly controlled, it should differentiate itself from purely private corporations, which aim only to maximize shareholder profits. Companies with “national blood” should think about the future of the people, but at the same time, they can also be pinnacles of national innovation.