F or decades, western companies and wealthy investors have been rubbing their hands at the prospect of Asia’s largest countries announcing large-scale sell-offs of state-owned enterprises. Unfortunately for them, countries like India and its neighbours in the Far East have been less receptive to the idea, either rebuffing the notion altogether or inadvertently scaring investors away by imposing such draconian terms on how the sale should be managed and the company run with the blessing of employees, management and the government – all of which could be shareholders.
But there are now signs that governments in Asia have got round to the idea that they may need to cede more management control when they sell off part of the business. After winning a strong re-election mandate last year, India’s Congress party-led government has said that it will press ahead with stake sales in state firms as it no longer has to depend on Communist support to survive in parliament. The government has promised to keep at least 51 percent stakes in all public sector companies, but the concept of any privatisation is fiercely opposed by leftist parties and unions.
In August India announced that it is considering selling stakes in two state firms, Shipping Corp of India and trading operator MMTC, as it readies for its biggest ever divestment – the sale of a holding in Coal India that could raise $3.8bn. The issue is expected to be launched on October 18.
The government has a goal of raising 400 billion rupees ($8.7bn) from selling stakes in state-run firms in the fiscal year to March 2011 as it seeks to raise funds for infrastructure and poverty alleviation. The sale of the stake in Kolkata-based Coal India, which accounts for 80 percent of India’s coal output, would be the country’s largest ever new share sale, analysts say, outstripping utility Reliance Power’s $2.9bn share sale in January 2008.
Buoyed by success of share sales in two state-run firms earlier this year, the government has also cleared sales of stakes in Steel Authority of India Ltd., Power Grid Corp of India Ltd. and Hindustan Copper Ltd. No dates for the sales have been set. Since April, the government has raised $260m by selling shares in hydro producer Satluj Jal Vidyut Nigam and $210m through a share sale in Engineers India.
Unsurprisingly, India’s massive coastline and its geographic position as a gateway to Africa and the Middle East to the west, and China and the Far East to the east, makes it an ideal location for shipping operators and logistics firms to set up. With 13 major ports, around 200 non-major ports and a coastline of 7,500km, global consultancy firm Ernst & Young and industry chamber Ficci believe that India offers huge opportunities for the maritime industry.
“Indian ports are now witnessing unprecedented interest both from strategic buyers, including international liners, terminal operators and captive players, as well as financial suitors, including banks and infrastructure funds,” say E&Y and Ficci in a report issued in August. It adds that to leverage this opportunity and to ensure optimum utilisation of the coastline, the Government of India is encouraging more private-sector participation in ports’ development.
“By establishing a direct link between performance and profitability, privatisation motivates private entrepreneurs to improve their return on investment and provides them with an incentive to continuously improve their efficiency,” E&Y’s infrastructure practice partner Sushi Shyamal says.
Other countries in the region are also contemplating selling-off their state assets, although probably not at the rate that investors would like. If and when Indonesia’s state-owned enterprises are finally privatised, analysts say that it will usher in a new era for the often poorly run firms. For years now, the government has been planning to list many of these companies on the stock market to raise fresh funds. But privatisation will bring much more than just additional money – it will inject new ideas and professional management practices into companies that have been underperforming for years.
There are more than 140 state-owned enterprises in the country, the vast majority of them loss-making and badly managed. But Indonesia’s State Enterprises Ministry says that as many as 10 of its companies will be ready to go public by next year, as the ministry expects the country’s economy to continue improving and experience a surge in capital inflows.
State Enterprises Minister Mustafa Abubakar has said that with the stock market roaring, this would be a good time to list the better managed and more profitable companies. Although he has not provided any names, he has said the targeted companies were in the insurance, agriculture, finance and construction sectors. Mustafa has also said the companies would prepare their IPOs starting early next year, and he expects that they could be ready by the end of the first half.
Analysts have highlighted a number of state-owned enterprises that could easily be privatised successfully. One such company is construction firm Waskita Karya, which plans to sell 35 percent of its equity to raise IDR 600bn ($66.6m). The government held a roadshow in September for the country’s largest steel maker Krakatau Steel’s initial public offering which was aimed at targeting international corporate investors in Asia, Europe and the US.
The Indonesia Stock Exchange said that Krakatau Steel had filed a document saying it would float 20 percent of its shares through an IPO which is scheduled to be launched on 11 November 2010. The company might offer another 10 percent in shares in a second listing. Other state companies that are looking to be privatised next year are another state construction builder Hutama Karya, state insurance company Jasindo, state cement company Semen Baturaja, and state finance firm Permodalan Nasional Madani.
Another Asian country that has had a poor reputation with regards to selling off state enterprises is Vietnam. But in January this year the country appeared ready to restart its privatisation drive after the government signalled it was preparing to sell two of the largest state-owned enterprises. Nguyen Tan Dung, the Vietnamese prime minister, earmarked Petrolimex, the largest fuel importer and distributor, and Vietnam Steel Corp, the steelmaker, as the next candidates, but did not give a timetable. Details of the sell-off are still being prepared. Analysts have said that it is impossible to give an accurate valuation for either company because they do not publish accounts. Petrolimex – which controls 60 percent of the fuel distribution market in Vietnam and has 6,000 petrol stations – turned over an estimated $1.3bn in 2008 and could be worth between $1bn and $1.5bn.
In August the Prime Minister also approved the equitisation plan of the Vietnam Electrical Equipment Joint Stock Company. The company will sell part of the state’s stake in the corporation, and at the same time issue more shares to increase chartered capital. The Ministry of Finance will sell a 11.21 percent stake via auction at the Hanoi Stock Exchange, while the state retains a controlling 85 percent stake. The remaining three percent stake will be sold to a trade union.
Analysts say the move, known as “equitisation” in Vietnam rather than the more politically charged “privatisation”, marks a return of confidence on the back of strong economic data and recovering markets. So far, the long-pledged privatisation drive has stuttered. A free trade agreement with the US in 2000, and the 2007 accession to the World Trade Organisation indicate the government’s commitment to economic transformation, but the country remains a one-party communist state. State-owned enterprises continue to dominate the economy, and equitised enterprises account for only about 15 percent of total state-owned enterprise capitalisation.
Hanoi is scheduled to sell more minority stakes in high-profile enterprises. The country aims to privatise 1,000 state-owned enterprises by 2015. Yet the communist authorities’ apparent emphasis on maximising profits from these sales rather than ensuring long-term benefits to the companies and the wider economy has hindered deals and deterred investors. In particular, prospective foreign buyers have balked at a peculiar legal requirement. These buyers, who are supposed to be selected and announced before the domestic IPO, are legally bound to pay the average bid price achieved at the auction if that is higher than theirs. The average bid price is calculated following a Dutch auction for shares offered to domestic retail and institutional investors.
Furthermore, IPOs take place before the enterprises have been legally converted into shareholding companies, leaving uncertainties about which assets (and liabilities) will be transferred to the new corporation. Often the new companies are not established until months after the IPO with the enterprises holding investors’ money in the interim. Investors say the process is out of touch with the realities of business The flaws in the process became evident with the botched partial privatisation in 2007 of Bao Viet Insurance, the country’s largest insurer. While 11 leading names in global financial services – including Swiss Re, Nippon Life and HSBC – carried out due diligence on Bao Viet, all resisted the legal requirement that they commit to paying the average price to be reached at auction.
Similarly, when Vietnam’s state-owned Vietcombank put out a call in 2007 for potential strategic investors, big financial groups such as Goldman Sachs and GE Money of the US and Japan’s Mizuho and Nomura all queued up for the chance to buy into one of the largest commercial banks in one of Asia’s fastest-growing economies. Vietcombank hoped a tie-up with a respected international partner would help it command a high price in an initial public offering as well as improve operational efficiency amid competition from foreign banks entering the market. Yet neither the global players nor the Vietnamese bank achieved their ambitions. After looking at both the bank and the rules governing Vietnam’s state enterprise sell-offs, all potential foreign bidders walked away. Eventually, Vietcombank proceeded with a domestic flotation that raised $625m.
Since the equitisation process started in 1992, Vietnam had restructured 5,556 state-run enterprises (SOE) and eight corporations by the end of 2008, including 3,854 companies that were equitised, 155 firms that have been sold, 30 which have been leased and 531 that have been merged. In 2009, Vietnam restructured 105 state-owned enterprises, including sales of shares in 60 companies, meeting 8.4 percent of the national plan during 2009-2010. The sluggish process during 2009 was attributed to the economic crisis and improper policies related to privatisation and share sales.
But foreign ownership has not reached the levels that either foreign investors expected or the Vietnamese government hoped for. As at the end of 2008 foreign investors held only six percent stakes in 3,854 Vietnamese enterprises which were equitised. The state owned a combined 57 percent stake in these companies, while the staff and other investors held 14 percent and 23 percent, respectively.
However, the Vietnamese government has acknowledged that selling shares in state-owned enterprises to foreign investors has helped to improve their management capacity and raise a great amount of funds for the state budget. The government has also indicated that it wants to lure more foreign capital into the country by saying that it plans to change the regulation surrounding share sales so that strategic overseas investors would be allowed to buy stakes in state-owned enterprises before an IPO takes place.
Such promises seem to be helping to raise Vietnam’s investment profile and the overall outlook is positive. In its World Investment Prospects Survey 2009-2011, the United Nations Conference for Trade and Development found Vietnam to be the world’s 11th most attractive destination for FDI (after ranking 6th in 2007-09).
