Privatisation is bad, peoplisation is good

IN-2
logoWednesday, 5 April 2017
Privatisation is selling a state-owned asset to the highest bidder. Peoplisation of a state-owned entity is creating a new public company and selling its shares to the public and ensuring that no single individual owns more than point one percent of the company.

To put it into a context, a little bit of history about the rise and fall of state-owned enterprises, our so-called public companies that are family owned and controlled and a sustainable private sector model like in the UK.

Who should get the profits?

When Karl Marx was developing his philosophy, labour was a very important component, in any economic activity. His view (which was indeed correct) was that the wages paid to the owners of capital was totally disproportionate to the wages paid to labour. Whilst labour was paid a pittance, the providers of capital pocketed the bulk of the profits. The solution envisaged by Marx was for the means of production to be owned by the state, which is the same as saying it has to be owned by the people.

The communist block

Acolytes of Marx and Lenin murdered the Tsar of Russia and created a new economic order where all the means of production were owned by the state. Led by Russia the Eastern European countries (loosely referred to as the communist bloc) was dominated by state-owned entities. Mao took China down the same route. Many other countries moved to increasing the role of the State including Britain under Atlee and his Labour Government.

The state-controlled economies had its defects but were not total failures. When the USA put a man into orbit, so did the Russians. When USA had the nuclear bomb, they also had the bomb. When America had a punch up with the communist bloc in Vietnam, the communist bloc won the scrap.

The winds of change

The state-controlled economies chuntered along, until inspired leaders saw that they lacked the fizz, drive and innovation of private sector capitalism in the West. This thought when canvassed in the public domain by some leaders spread quickly like a flu through the communist bloc, and they rapidly changed gears to move to a free enterprise system.

When the state-owned enterprises in the communist world started to fall like ninepins it also created a tsunami of change that also swept away the old political system.

The reasons for the lack of dynamism in state enterprises have been analysed endlessly. There is a vast stack of literature on the subject. Basically the system was deemed to be too bureaucratic, no freedom for innovation, a fear to make decisions, no motivation to pursue excellence, etc.

Today no one in academia, business schools, management consultants or business people are making a case for state-owned enterprises.

Objections to privatisation

Our tin rattlers in Parliament who make a noise like shaking stones in a tin and object to every proposal are also objecting to privatisation. They never make counter proposals. This may be a combination of an inability to do so and a lack of interest as their only interest is to be obstructive. So much for the rights bestowed by democracy. Tin rattlers are permitted.

What they do not make clear is whether they firmly believe (like the lunatic Trotskyite Marxists did many years ago) that state-owned enteWWrprises is the best model for sustained economic growth. Or, do they not have a view either way, but just like the feeling of making noise as tin rattlers?

The mad period, under Mrs. B

The followers of Marx in the LSSP who had never ever done a proper job in industry, commerce or business, and therefore did not know what makes an economy tick, succeeded in creeping under Mrs. B’s sari pota into Government. They were like children who had broken into the sweet shop. They set about nationalising everything possible. Even Buhari in Maradana was nationalised and like with all nationalised ventures the performance declined and we lost the excellent godamba roti and porrichi kolli at Buhari!

Eventually Mrs. B realised that the Marxists were not delivering any good results and were damaging the economy. The Trotskyite Marxist mafia was kicked out of government and ended up in the dustbin of obscurity.

Undoing the damage

When it’s done it is not easy to undo it. That has been the problem with undoing the damage done by the mad Marxists. In a democracy the tin rattlers can create the political fear that a government making the change from state-owned to private ownership will lose at the polls. To those in power staying in power comes first; what is good for the country comes a poor second. That is the current dilemma: Should they privatise state-owned enterprises and risk losing the next election?

Peoplisation and not privatisation

Privatising state-owned enterprises by selling them to the highest bidder is certainly a bad idea. It should be opposed. They will end up in the hands of the rich who have access to capital. The people will not benefit. It goes back to Marx’s lament about the owners of capital getting all the profits and the people getting nothing.

What should be supported strongly is a model where the government pursues a strategy of peoplisation. That is transferring the business of a state-owned enterprise to a new company with a very broad-based ownership structure, so that people can buy shares and benefit from the future earnings of the enterprise. This if presented well could increase the support for the Government.

However there is a danger that must be neutralised. Those with capital can start to buy up the shares of the new company in the market and end up with very large shareholdings in these companies. Therefore the articles of these companies must stipulate that no person individually or in concert with other parties can own more than 0.1% of the shares. There could be some exceptions for unit trusts, and the EPF and ETF and approved pension funds with different limits but with checks in place to prevent private individuals accumulating large blocks of shares through some devious means.

Objections will collapse

The objections to changing state-owned enterprises to private companies must collapse with the peoplisation model. The only available line of argument to oppose it is to maintain that a state-owned model is the most efficient economic model for the country. There are no facts to support this argument.

Furthermore, the logical extension for such an argument is to move to a communist state where everything is state owned. The electorate in Sri Lanka has completely rejected this, and to the extent that Dr. Vitarana of the LSSP, the nephew of Dr. N.M. Perera (the arch Marxist) cannot even win an election to get a seat in Parliament.

New companies must be oligarchies

Oligarchy is defined as governed by a few people. The new companies should be oligarchies composed of just the board, of executive and non-executive directors with the non-executive directors in a majority. This concept is not new, or novel, or lunatic.

Most of the major companies in the top 100 companies in the UK like Glaxo, Diageo, Unilever, BP and Reckitt Benckiser are oligarchies. I worked in the latter company for 33 years. The oligarchy structure works extremely well. The reigning oligarchs (the Board) plan the succession, and pass on the power to govern to their successors. So these companies are self-perpetuating oligarchies.

There are a number of rules and conventions to ensure that they work well, like firm age limits for retiring, the number of years a non-executive director can serve, the various qualities to be reflected in the composition of the non-executive directors team, etc. (they cannot all be off spin bowlers or opening bats. There has to be the right mix!).

Sri Lankan public company that is an oligarchy

There is an excellent example of a company that is an oligarchy in Sri Lanka, namely John Keells Holdings Plc. They do not have any controlling shareholders. Nobody from outside pulls any strings or whistles any tunes for the Board to dance. Each group of John Keells oligarchs have planned their successors and the baton has moved seamlessly. From Bostock to Blacker to Ken Balendran to Lintotawela to Susantha Ratnayake who has already announced that in a year-and-a-half the baton will pass on to his successor and team.

I was on the John Keells Holdings Board as a Non-Executive Director and saw at first-hand how well the system worked and they have demonstrated over and over again that an oligarchy company can deliver excellent results. What we need are more companies like John Keells.

A sustainable private sector model

The UK is a good model to emulate. All the major public quoted companies have a very broad based share ownership structure. With a very few exceptions there are no controlling individual shareholders. They are run by the boards of directors for the benefit of all the shareholders. Every individual can invest their savings in shares, directly or through various other schemes that also invest the money in shares like funds, unit trusts, etc. Pension funds are major investors in shares and so are insurance companies.

The important take from this is that the whole of society through their personal investments, their pension schemes and their insurance policies benefit from the growth in value of public quoted companies. There is this happy fusion of interest between the people and the public company sector. This makes it a very sustainable model.

Sri Lanka model is very different

It is completely different from the model in the UK. Here there is no fusion of interests. The public companies almost without exception are closely held by individuals or families. They are really private companies in many respects but masquerading as public companies. If they do well 80% of the profits are pocketed by the controlling shareholders. This group of people pay low income tax, pay no capital gains, or estate duty.

Not enough shares are available to the public. EPF, ETF and other pension funds cannot take a large shareholding as the shares are not available. All segments of society cannot directly or indirectly invest and benefit from the growth in value of public companies. This gulf between big business and the people is further enhanced by the large private companies where not a single share is available to the public.

Maliban, Munchee (Ceylon Biscuits), MAS, Brandix, Hirdaramani Group and many more are all private companies. They are not great contributors to tax revenue. To get the revenue it requires the Government has to depend on indirect taxes on goods and services. This puts a heavy burden on the less well to do. Barely a pinprick for the rich.

In this context if the Government were to privatise good State-owned enterprises and sell them to the big business community which then makes them closely held public companies, it will trigger loads of high voltage emotions that will create a powder keg. Someone may set fire to the long fuse that is connected to this powder keg.

(The writer has served on a large number of Boards of Directors, in Sri Lanka, the UK, and other parts of the world. He is also the only Sri Lankan who has been on the Main Board of a UK top 100 company.)

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