Monday, December 20, 2010

Inefficient Government Practices Have Caused Economic Cancer

Inefficient Management Practices Have Caused Economic Cancer
China Times editorial (Taipei, Taiwan, ROC)
A Translation
December 20, 2010

In classical economics, the government's role is to establish a system, enforce the law, build an infrastructure, and create a favorable environment for business and investment. Everything else is left to the market. It is now the twenty-first century, The government has been granted more authority. But its economic role has not changed that much. During the past year however, several major investment projects show that the government has exceeded its proper role. It has imposed unwarranted restrictions before the fact. It has imposed inefficient management after the fact. It has become a cancer afflicting the economy and industry.

Take the Kuokuang Petrochemical project, i.e., the Eighth Naphtha Cracking Plant, which is facing a life for death situation. The project was first proposed in 2005.
It was approved by the CEPD the following year. It then underwent environmental assessment. Construction was supposed to begin in 2008. But as of 2010, it is still being reviewed. If the Kuokuang Petrochemical project ought not to be approved at all, that is one thing. But frightening government in efficiency is another thing altogether. Such inefficiency dramatically increases business risks and investment costs. If government efficiency was increased, and ensured the survival of the Kuokuang Petrochemical project, a company such as Kuokuang would find it easier to survive. It would not be mired in a hopelessness morass, like everyone else.

The government has only just arrived at a decision. If it approves the investment,
the manufacturer will still face substantial cost increases. Its capital outlay will increase from 400 billion to 600 billion. It will also be battered by other petrochemical companies. If rejected, it will be forced to migrate to the Mainland.
Because the project has been subject to delays, other major petrochemical plants have made advance arrangements. Therefore it faces a dilemma, and is unsure whether to advance or retreat. The government may say that the EIA process is protracted because it requires approval by so many different government agencies, experts, and environmental groups. Therefore it "simply cannot be rushed." But let us examine several straightforward investment projects that required approval by only a few government agencies. Let us see how government delays undermined these companies.

Consider AIG, a US-owned company, and its sale of the Nan Shan Life Insurance Group. Bidding was opened in mid-2009. The bid was awarded in October of that year. China Strategic Holdings, a Hong Kong-owned company, and the Primus Group won the bid. The sale was then submitted to the government for review. The result? The review took nearly one full year. The review dragged on until August of this year. Only then did the government announce that the deal had been disapproved. We have no objections to the government rejecting a sale because a major shareholder was ineligible and fears that the insurance industry might be destabilized. But was such a long delay really necessary? During a long delay, a company's future could hang in the balance. A long delay could amount to a death sentence for Nan Shan Life Insurance.

Nan Shan was once an outstanding, blue chip, Taiwan-based insurance company.
But after AIG announced its sale, Nan Shan endured a period of uncertainty. The company's management and operations were virtually in limbo. Employees fretted over their futures. Old policyholders worried about their coverage. Potential policyholders became more difficult to sell. In 2007, before it was sold, Nan Shan Life Insurance's market share of First Year Premiums (FYP) was 9,6%. By 2009 it had plummeted to 3.7%. This year it could drop below 3%. It has already fallen out of the ranks of the top ten. The devastating impact of inefficient government management on business should be evident.

Taiwan Mobile is a subsidiary of the Fubon Group. Last September Taiwan Mobile bought kbro from the Carlyle Group. The total transaction involved 32.8 billion NT.
The Carlyle Group took on 24 billion in debt. The total investment amounted to nearly 57 billion. The investment project underwent "detailed review" by the National Communications Commission (NCC) for nearly one year. At the end of that year, it was rejected. It was rejected because the NCC completely misunderstood the clause prohibiting "political party, government, and military ownership of the media." Fubon was forced to purchase kbro in a private capacity. Less than a year later, the total cost of the M&A ballooned to 64 billion. Under NCC mismanagement
a Taiwan-based company was forced to pay an extra 20 billion NT. The NCC certainly handed a foreign corporation a windfall profit. Meanwhile, the FSC's "three financial laws" have bound the financial industry hand and foot. They have exacted unreasonable penalties from industry. All one sees is clueless bureaucrats imposing crippling restrictions and engaging in rampant mismanagement.

Recently Hon Hai chairman Terry Gou attracted considerable attention when he blasted the government for undermining the flat panel industry. This was yet another case of inappropriate and inefficient government management. In March of this year, AUO applied for permission to construct Generation 7.5 plants on the Mainland. It is now December. The Ministry of Economic Affairs is still "reviewing the application one line at a time." Fortunately Terry Gou raised a stink. Otherwise who knows how long the review process would have dragged on. Guo's attack forced Premier Wu to respond on behalf of the Ministry of Economic Affairs. Wu announced that "The application has already been approved. All that remains is the paperwork." The Ministry of Economic Affairs will grant its official approval as soon as possible. Because of the year long delay, vendor opportunities were lost. Local panel manufacturers on the Mainland have already begun constructing Generation 8.5 plants. Earlier this month, the South Korean government spoke out on behalf of South Korea's Samsung and LG. They too received official approval from the Mainland authorities. Only Taiwan's vendors have the misfortune of finding themselves trapped in the slow lane, behind the Ministry of Economic Affairs. All they can do is wring their hands as they run in place.

Frankly, the way the Ministry of Economic Affairs has handled Taiwan-based investments on the Mainland is unprofessional and unreasonable. The only plants it permits manufacturers to construct on the Mainland are those producing third-rate technology. The Ministry of Economic Affairs treats twelve-inch wafer fabs
and 90 nanometer technology as if they were national treasures. It prohibits their construction on the mainland. The Mainland, by contrast, treats them as if they were any other local or foreign enterprise. The Mainland has already constructed over a dozen twelve-inch wafer fabs. It has already adopted 90 nanometer manufacturing procedures. Mainland Chinese and South Korean panel makers have already adopted Generation 8.5 plants. AUO however, is only permitted to build Generation 7.5 plants. As a result its competitiveness suffers. Time delays make matters worse. AUO originally seized the initiative. Now it has been reduced to playing catch up. The Mainland has already transformed its global factory into a global market. Our own Ministry of Economic Affairs, on the other hand, still binds our own industries hand and foot. How can they possibly compete with major global companies on the Mainland market?

Such is our government. From the Ministry of Economic Affairs, to the FSC and the NCC. Every ministry is rife with inappropriate, unreasonable, inefficient management practices and restrictions. They have all negatively impacted industrial development, business investments, and Taiwan's competitiveness. We expect the government to improve its management efficiency, and avoid delays while reviewing investment projects. It must expedite these investments projects and help them succeed. If the projects should not be approved, they must be reviewed promptly,
We can no longer tolerate unprofessional and politically motivated restrictions and management practices.

2010-12-20 中國時報











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