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MBO bid needs transparency
By Zhu Qiwen (China Daily)
Updated: 2004-12-31 10:08

Improved profitability is a compelling evidence of the necessity and effectiveness of China's ongoing property right reform of State-owned enterprises (SOEs).

The high-profile moves the Chinese authorities have recently made to strengthen regulation on management buy-outs (MBOs) in State-owned enterprises indicate that it is high time to standardize the course of reform.

There have been a surge of such calls since Larry Lang, a professor with the Chinese University of Hong Kong, sparked domestic debates early this year with a series of articles exposing allegedly flawed MBOs during the restructuring of some State firms.

An MBO refers to the acquisition of all or part of the equity capital of a company by its directors and senior executives.

As an approach to diversify property rights structure, MBOs were adopted in the reform of many SOEs in recent years.

Though no official response was directly made as to the problems Lang raised, the State-owned Assets Supervision and Administration Commission (SASAC) has recently made known its position against irregularities in SOE property transfer.

"Reform of State-owned enterprises across the country has achieved remarkable progress," claimed Li Yizhong, deputy director of SASAC, at a recent summit on China's SOE ownership reform and property transfer.

Between 1998 and 2003, the number of State-owned enterprises in China had been slashed by 40 per cent from 238,000 to about 150,000. Meanwhile, the aggregate profits these SOEs realized had soared by 22.2 times from 21.37 billion yuan (US$2.58 billion) to 495.1 billion yuan (US$59.9 billion).

It was reported that in the first 10 months of this year, the 180-odd central SOEs and groups already netted 418.9 billion yuan  (US$50.6 billion) in profit.

These figures demonstrated that the country's strategical restructuring of the State sector is bearing fruit.

Chen Xiaohong, director of the Enterprise Research Institute of the Development Research Centre of the State Council, attributed the good performance of SOEs this year to three reasons.

One is rapid industrial growth. Though the Chinese Government adopted a slew of tough measures to rein in breakneck investment growth earlier this year, the State sector, as a whole, has escaped from credit screw and managed to maintain growth momentum.

Secondly, large SOEs have benefited from their monopoly of key industries like energy and telecommunications.

And thirdly, property right reform of SOEs over the past decade has helped, Chen said.

The debt-to-share swap scheme in the 1990s has substantially improved many SOEs' financial condition. More importantly, the listing of SOEs at home and on overseas stock markets helped upgrade their corporate governance and efficiency.

A decade of SOE property right reform has adjusted distribution of State assets in the national economy.

"But there are major problems. Ownership reform is too simplistic," pointed out Li, deputy director of SASAC.

The central government has suggested revitalizing small and medium-sized SOEs with various methods including reorganization, mergers, release, share-holding co-operation and sales and.

But in practice, local governments have mostly chosen to sell SOEs.

"There are also irregularities in the process of property right reform of some enterprises," noted Li.

Illegal acquisition of State assets through under-the-table deals and underpriced sales have not only infringed the legitimate interests and rights of employees, but also resulted in the loss of State assets.

Irregularities in MBOs have been particularly singled out as a cause for more supervision to ensure the fairness of the reform process.

Some people have even gone so far as to demand a blanket halt of SOE property right reform and State asset transfer.

Yet, since SOE reform remains at the core of the country's overall economic transformation, such an argument is obviously one-sided.

"Our opinion is that MBO tends to combine ownership and power of management into one, which is against the principle of establishing a modern enterprise system. Related laws and rules have yet to be perfected," said Li.

"MBOs will not apply in large SOEs. And based on their actual conditions, some small-and- medium-sized enterprises should explore this practice in a standardized way only after ownership of State assets are clearly defined."

This remark was an explicit official reply to public concerns about the loss of State assets during the SOEs' MBO process.

The SASAC, the supervisory body of State assets, was responsible for appreciation of the country's State assets. In the long run, these assets will be the main financial resources that China can make use of to meet its social security challenges in the future. To plug loopholes like poor-quality auditing, unaccountable asset evaluation and lack of transparency and standards in property right transactions, a State assets watchdog is needed.

Nevertheless, to ensure the efficiency and fairness of SOE reforms, it is also imperative for the SASAC to develop a mechanism that can scientifically define and institutionally prevent loss of State assets during their transfer.

The simple answer Zhang Chunlin, an economist with the World Bank, gave to the pricing problem was "check price and competition."

Zhang insisted that the key to determine the "loss of State assets" during the reform of SOE property rights is to strictly distinguish the check price and target price.

"There is a problem of loss of State assets only when the purchase price is lower than the check price," said Zhang. "Otherwise, the so-called 'loss of State assets' is actually a problem about how to maximize the State's interest."

Zhang believes that the primary method to maximize the national interest is to increase competition and transparency.

A fair and transparent public bidding system will enable all potential buyers to make informed decisions. And a choice between competitive contenders can thus be made in the best interests of the State.

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