State-run firm's problems came with share sale

The scandal disclosed yesterday involving Taiwan Fertilizer Co (台肥) exposed a serious flaw in the government's privatization program, analysts said. Unless the government improves the supervisory system, there will more scandals involving privatized state-owned companies in the future.

Some analysts even suggest that the government release all state-owned firms and let the private sector operate these companies.

The government should no longer be a major shareholder of privatized companies. If the government does not realize this, it might as well not even privatize such firms in the first place, they said.

"The major responsibility for the Taiwan Fertilizer scandal should be placed on the Commission of National Corporations (國營會)," said Norman Yin (殷乃平), a professor at National Cheng-chi University.

"If there is no improvement in the supervisory mechanism, similar incidents are likely to happen again and again. Taiwan Fertilizer's NT$4 billion fund misappropriation is not an accident," Yin said. "It reflects the gray area created by the privatization of state-owned companies."

"The privatization of state-owned companies is supervised by government entities, primarily the Commission of National Corporations and the Legislative Yuan. After state-owned firms are privatized, they are no longer closely watched by these government agencies," Yin said.

"Nevertheless, the largest shareholders of privatized companies are still a government agency, and the directors and managers are therefore assigned by the government. This means that small investors cannot monitor or intervene in company policy, which is made by the directors and managers, and therefore, the supervisory mechanism that exists in most publicly listed companies is not effective here.

"This creates a loophole so that almost no one can effectively monitor or supervise these `privatized' companies," Yin stressed. "The biggest concern is that many other privatized firms could create similar problems if we do not improve the supervision mechanism -- especially when many large state-owned companies like Taiwan Power (台電), China Petroleum (中油) and Taiwan Sugar (台糖) are all going to be privatized in the years to come. Even bigger problems will be created since they have even more assets and company funds [than Taiwan Fertilizer]."

To resolve the dilemma, "Complete deregulation of state-owned companies is the answer," said Wu Hwei-lin (吳惠林), a researcher at the Chung-hua Institute for Economic Research (中華經濟研究院).

"We should remove all regulations for protecting monopolistic activity in the economy," Wu said. "The problems stemming from state-owned companies has always been the protection of monopolistic behavior. If we can deregulate all the current protection mechanisms and let all state-owned companies become completely privatized, open market mechanisms will force firms to work out inherent problems as they face increased competition.

"This could solve many problems that come out during the privatization process, such as employees fighting for job security or legislators abusing their power."

Yin was skeptical. "We can use the Company Law or the Securities Exchange Law to punish Taiwan Fertilizer's directors. But now it's already too late," he said.

"One of the ways to supervise privatized companies effectively is to strengthen shareholder power. Any abuse or wrong-doing by the directors or managers could then be disclosed in the early stages at shareholder meetings and quickly stopped. The supervisory agencies can then act expeditiously to prevent anyone from misappropriating company funds or other assets.