Reforming public corporations (3)Privatization lessons abound abroad

Reforming public corporations (1) Reforming public corporations (2) Reforming public corporations (3)

Margaret Thatcher was inaugurated as Prime Minister of the United Kingdom shortly after the nation escaped from a foreign exchange crisis with relief financing from the International Monetary Fund. She pursued privatization of public enterprises in a massive way starting in 1979 in order to reduce the government's direct intervention in economic activities and to enhance corporate efficiency.

As a result, she has changed British Telecom (BT), one of the most insolvent public enterprises, into the world's best telecommunications company, setting it as a model for reform of public company.

The key to public enterprise reform that is being pursued by the government is privatization. Experts say that introduction of competition though privatization is the best way to enhance competitiveness of insolvent state-run companies. It can be seen in successful reform of public enterprises abroad.

The British government, led by the Conservative Party, privatized most state-controlled industries and businesses during its 13-year reign from 1979. BT was a money-eating machine until the early 1980s because of its excessive manpower and facilities, aging facilities and poor-quality service. The British government pursued a three-phase privatization through domestic and overseas sale of its equity.

As a result, the company's ownership structure changed, with over 45 percent of its equity owned by small shareholders with less than 4 million shares, which breaks down into 19 percent owned by individual investors and 81 percent by institutional investors. Also, major corporate decisions are made through the director's meeting, which consists of four executive directors and nine outside directors.

Through the restructuring, the company reduced its manpower from 250,000 in 1982 to 130,000 in 1999. Thanks to successful restructuring, BT's share price doubled within a year, tripled in three years and jumped with a four-fold rise in five years. Its current share price represents a nearly 20-fold increase from the time when it began privatization.

Privatization of British Gas was carried out in a way that is different from BT's. The government sold 97 percent of British Gas shares through the stock market in 1986, and it was run without any controlling owner after privatization. As a result, its management efficiency has eroded, and its asset value, which amounted to 9.7 billion pounds in 1986, plunged to 7.7 billion pounds in 1996. In 1997, the company was divided into two holding companies and a strong restructuring was carried forward. With successful reform, the company's share price jumped more than 40 percent in 1998.

The French government embarked on privatization of public enterprises in a bid to resolve their debt problems. It has adopted a flexible method of sale.

Between 1986 and 1991, the French government pursued privatization of 65 public enterprises through sale of their shares. In particular, the government liberalization qualification of potential buyers of the public enterprises, even including other competing public firms and overseas companies. By doing so, it has secured 825 trillion francs of financial gain.

In Mexico, the government sharply reduced the number of public enterprises from 1,155 to 195 through privatization from 1982 through 1994. As a result, the Mexican government reduced its financial deficit, which stood equivalent to 1.3 percent of its gross domestic product, to a surplus that is equal to 3.1 percent of its GDP in 1992. What is more important, Mexico has recovered its national credibility, and foreign investment in the country has increased substantially.

Chile also pursued privatization of electricity, long-distance telephone service and other publicly run businesses between 1985 and 1989. The Chilean government realized that financial self-reliance is impossible without a fundamental change in the price-deciding system. So it has liberalized the price of services provided by public enterprises despite the risk of inflation.

Experts point out that reform cannot be achieved under a uniform criterion for all public enterprises. What is important is that the way of thinking of politicians and bureaucrats, who consider the public firms as tools for policy measures, has to be changed, they indicated.

Nam Il-Chong, a research fellow at the Korea Development Institute (KDI), said that the government must work out a vision to make the public firms into blue-chip companies.

"If privatization is the general trend, it is necessary for the government to present a crystal clear vision, as well as understanding among involved parties," Nam said.

Lee Hoon dreamland@donga.com