Privatization of CPC may be troubled

Chinese Petroleum Corp (中油) is to be privatized in one fell swoop early next year in a race to boost the company's competitiveness ahead of the entry of foreign firms to the domestic market.

Wu Hsueh-liang (吳學諒), an official from the Council for Economic Planning and Development, said last week that the Cabinet privatization committee had approved changes to the privatization plan which was drawn up in 1998.

"The conditions in 1998, when the original plan for Chinese Petroleum's privatization was formed, have changed considerably, requiring a modification of the process," Wu said.

The original plan had called for the sell off of over 50 percent of the company's shares in three stages over a period between two and four years. Under the revised plan, privatization would be achieved in one massive sell-off which could be put in motion immediately after gaining legislative approval.

Wu expects approval of the scheme during the next legislative session in February or March.

Implementation of the plan was stalled after a delay in the passage of the Petroleum Management Law, which was passed in September. The law provided a legal framework for Chinese Petroleum's privatization.

"In 1998, Chinese Petroleum was a monopoly and its earning prospects were extremely good," Wu said. "Now, with tough competition from Formosa Petrochemical Corp (台塑集團) and the imminent entry of foreign firms into the market its prospects aren't as good," he said.

To be competitive under the new conditions, privatization of Chinese Petroleum will be vital, according to Chen Chih-hong (陳智宏), a spokesman at the Commission of National Corporations, which overseas state-run firms.

"Chinese Petroleum is facing an unstable environment. If it wants to be competitive it must free itself from government price controls and budget targets set by the legislature," Chen said.

Tony Tsai (蔡東松), an analyst at Taiwan Ratings Corp (中華信評), said that flexibility will be an important key to Chinese Petroleum's competitiveness.

"Government controls place a heavy burden on the company," Tsai said. "Privatization will benefit the company by affording it greater flexibility."

The government is likely to hold on to at least a third of the company's stock for five years, which will give it an influential role in the company's operations.

Another observer commented that without privatization, Chinese Petroleum, which is capitalized at NT$130 billion, would be slowly bled dry by more efficient competition in the private sector.

"Chinese Petroleum will run into operating losses over the next two years if it remains a state-owned company," said Raymond Hsu (許智清), an analyst at Grand Cathay Securities Corp (大華證券).

As a state-run firm "it is very inefficient in terms of production and cost control, and the head count [staff] is of course many times that of private producers. But after it is privatized, all the cost saving and competitive measures can be adopted quickly," he said.

The government will offer between 30 percent and 40 percent of shares to strategic investors and around 10 percent to employees, Wu said.

Hsu, however, doubted the ability of a depressed market -- of which over 80 percent is made up of retail investors -- to absorb such a huge volume of shares at one time.

"It will be very difficult for the government to release such a huge lot of shares into the market, because the market cap for Chinese Petroleum is quite large," Hsu said.