Chicago Global

Privatization: a bitter bite for consumers

In 1990, a century after the enactment of Sherman Act, the Italian Parliament adopted law no. 287, introducing competition law (as it is called in Europe) in Italy, a country with too many monopolies.

Since that date, many privatizations have been carried out. Telecommunications, Energy (oil, gas, electricity, water) and Highways. They have all been extremely profitable, since have allowed the new owners to exploit in the competitive market infrastructures and licences (i.e. essential facilities) respectively built and granted under the public monopoly and paid for by taxpayers money. The economic potential of these companies became clear when they were listed on the Milan stock exchange and many investors slept in tents set in front of the banks' doors to be the first one to buy the newly issued shares. Of course, the shares have been sky-rocketing since their issuance!!!!

Privatization seemed the dawn of a new era of prosperity and many foresaw increased competition and lower prices to the benefit of Italian consumers. The truth, instead, was that the wave of privatizations has replaced the public monopolist with private monopolists. There are several evidences of this phenomenon.

In the telecom sector there has been a moderate increase in competition. New operators have entered the market of both fixed and mobile telephony. However, the process seems to be incomplete. In the fixed telephony there is competition, but the infrastructures (the phone network and the relevant band capacity) are firmly held by the former incumbent. Pursuant to EU telecom rules, the incumbent has been notified as a holder of Significant Market Power (SMP), a definition which triggers temporary and asymmetric regulatory measures aimed at increasing competition. The former incumbent has been fined € 152 million for violating such measures. However, full separation between network ownership and service provision has never been considered...

In the mobile telephony market an oligopoly with three operators has established. Competition might further develop if Mobile Virtual Network Operators (MVNO) were allowed to enter the market. MVNO are operators which lack the network to operate mobile telephony services, but are entitled, pursuant to asymmetric regulation, to purchase band capacity from the SMP operators already in the market. The SMP operators, however, refuse to sell band capacity and are under investigation by the IAA (the decision shall be adopted within days).

In the energy sector, there is a substantial monopoly held by the former incumbents. The biggest of these once state-owned giants, has recently been fined € 290 million for refusal to deal, having refused to sell pipeline capacity to new entrants on the Italian energy market. The cost of energy in Italy is the highest in Europe.

Highways are the last example of ill-fated privatization. The Italian highways network was privatized and sold to ASPI. ASPI was under investigation by the IAA for attempt to monopolizing and has settled a private antitrust lawsuit brought for the same reason. In these days ASPI is planing a merger with the Spanish counterpart Abertis. The merger, however, has raised multiple complaints and is currently under scrutiny because it is alleged to be a disguised sale of ASPI to Abertis, in breach of the Italian law regulating the sale of entities holding public licenses.

All these example make me reflect and conclude that privatization does not always mean increased competition. Is there a philosophy for privatization I can turn to?   

Foreclosure in Indonesia

A dispute between Deutsche Bank and Beckkett Pte Ltd, a Singapore registered group, gained attention among business people both in the western and in the eastern world. It involves one of the first cases following the Asia crisis in the late 90s in which a western creditor to an Indonesian real estate business was able to seize collateral and dispose of it. Therefore, the dispute is relevant both as a legal and as an economic and political issue.

The (undisputed) and simplified facts are as follows: In 1997 Deutsche Bank granted a bridging loan in an amount of $ 100m to a majority owned subsidiary of Beckkett called Asminco Bara Utama. The loan was intended to finance the expansion of Beckkett’s stake from 15% to 40% in Adora Indonesia, one of the largest Indonesian coal mines. The loan was secured by the 40% stake of Beckkett in Adora. Furthermore, Beckkett provided a guarantee. The following year, Asminco defaulted on the loan. After lengthy negotiations Deutsche Bank finally decided to foreclose on the shares and to sell them to another Indonesian business tycoon, Edwin Soeryadjaya, for $ 44.2m.

On February 21, 2006 Beckkett sued Deutsche Bank before the Singapore High Court asking to cancel the sale, return the shares as well as damages and payment for any lost dividends. First, Beckkett claims that Deutsche Bank was obliged under the loan agreement to raise a long term loan agreement when the bridge loan was due. Second, it alleges that Deutsche Bank disposed of the pledged shares at a too low price in order to wind up the guarantor, Beckkett.

Deutsche Bank, counterseeking the remaining amount that is still owed from the loan, both contests the alleged collusion with the buyer when selling the shares and its obligation to raise another loan fund. Moreover, it argues that Beckkett is only interested in the shares of the coal mine company as the price for Indonesian coal has risen significantly after the sale of the shares. With the recent upswing in global commodity prices, that stake is now estimated to be worth more than $400 million.

One Indonesian journalist reports on a blog that one of the parties invited six Indonesian journalists – not including him – to fly to Singapore paying for hotel, air tickets and meals to cover the trial (http://yosef-ardi.blogspot.com/2006/02/beckkett-vs-deutsche-bank-media-law.html). A day later, the journalist reports, an article on the trial was published in the newspaper Bisnis Indonesia. 80% of the article consisted of Beckkett’s arguments. For the journalist, it was clear which party invited the six journalists.

What makes the case so interesting for the business world is less its legal details. More important is its impact on the economic and political situation in the country.

First, Deutsche Bank’s reputation in the entire region is at stake. Critics of Deutsche Bank consider the case as an example of an over-enthusiastic global bank that provided the so called “tiger”-states with credit before the financial crisis of 1997 revealing the weak pillars on which the boom of those countries was founded at the time.

Second, a judgment against Deutsche Bank could be detrimental to Indonesia’s economy. International creditors, private equity investors and hedge funds follow the case closely which has been dogged by endless legal battles over document disclosure and marred by threats of intimidation and harassment. Wolfgang Topp, Deutsche Bank's Asia-Pacific managing director, talks of the bank “being literally held to ransom”, according to court documents. Topp says that he was interrogated by Indonesian police over allegations he was party to “deception or fraud” over the sale of the shares.

In the past, some questionable rulings against foreign investors did a lot of harm to the confidence of foreign investors in Indonesian judges to enforce contracts. The lack of legal recourse is widely considered as one of the major obstacles for foreign companies to invest in Indonesia. In case of a judgment against Deutsche Bank, Indonesia’s President, Susilo Bambang Yudhyono, will have a hard time to persuade foreign companies to invest in Indonesia, which is south-east Asia’s largest economy.

A verdict is not expected before next June.

First, Deutsche Bank’s reputation in the entire region is at stake. Critics of Deutsche Bank consider the case as an example of an over-enthusiastic global bank that provided the so called “tiger”-states with credit before the financial crisis of 1997 revealing the weak pillars on which the boom of those countries was founded at the time.

Second, a judgment against Deutsche Bank could be detrimental to Indonesia’s economy. International creditors, private equity investors and hedge funds follow the case closely which has been dogged by endless legal battles over document disclosure and marred by threats of intimidation and harassment. Wolfgang Topp, Deutsche Bank's Asia-Pacific managing director, talks of the bank “being literally held to ransom”, according to court documents. Topp says that he was interrogated by Indonesian police over allegations he was party to “deception or fraud” over the sale of the shares.

In the past, some questionable rulings against foreign investors did a lot of harm to the confidence of foreign investors in Indonesian judges to enforce contracts. The lack of legal recourse is widely considered as one of the major obstacles for foreign companies to invest in Indonesia. In case of a judgment against Deutsche Bank, Indonesia’s President, Susilo Bambang Yudhyono, will have a hard time to persuade foreign companies to invest in Indonesia, which is south-east Asia’s largest economy.

A verdict is not expected before next June.