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Privatisation: Study deep or comment not!

3 years ago

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A little learning is a dangerous thing; drink deep, or taste not the Pierian Spring: There shallow draughts intoxicate the brain, and drinking largely sobers us again Alexander Pope    There yet is much misperception about “privatisation”, that I thought I will share some experiences. Space does not permit me to explain the key generic principles I have outlined here, with corresponding real-life case studies which I have previously shared in print and electronic media, workshops, and strategy sessions. However, each of the observations I have made is based on hands-on practical experience, in advising and being consulted by many corporates, client consortia, or large enterprises, over three decades. These relate to the privatisation of state-owned enterprises (SOEs) advertised for whole or part divestment, such as Puttalam Cement, Veytex, Milco, Lanka Canneries, Leather Products Corporation, Tea Small Holder Factories, Steel Corporation, Sevanagala Sugar Industries, Hambantota Salt, Puttalam Salt, etc., just to name a few.  The respective assignments required me to design and execute diagnostic assessments, strategic reviews and redirection, debt-equity restructuring, and valuation of and bidding for SOEs on behalf of local and foreign clients. This also provided great insight into real issues, challenges, remedies, as well as misperceptions that employees had. The assessments also led me to advise the client or corporate I advised, to refrain from bidding. The professional time invested in these diagnostic assessments, which included resourcing the assessment with industry or domain experts from Sri Lanka or overseas, and the design of turnaround strategies and valuations often saved the corporate or client from an otherwise bad investment. The institutions I had to interact with were the Commercialisation of Public Enterprises Division (COPED) or the Public Enterprise Reform Commission (PERC).   Privatisation is broad-basing ownership I prefer to call it “broad-basing ownership” and providing the people an opportunity to have a proprietary stake in the SOE, while inviting the private sector to refurbish, modernise, upgrade, invest in, and maintain it, thus also sustaining employment in it. While there are examples of well-performing SOEs, some state-owned and controlled entities were mediocre, mismanaged, unproductive, and loss-making.    [caption id="attachment_94525" align="alignleft" width="300"] Puttalam Salt[/caption] Perpetuating mediocrity vs. strength and sustainability Political parties, and politicians, shy away from discussions on “privatisation” or pledge that they will not “touch” SOEs in the hope of winning the votes of employees. In doing so, they hold out hope – temporary hope – to the workers of a loss-making, underperforming, subsidised SOE, and give them a false sense of security. Living up to the pledge after elections has resulted in the need to perpetuate mediocrity in nonperforming and underperforming SOEs, and the need to finance subsidies, rather than the socially responsive stance of “building strength and sustainability” within the SOE and “medium to long-term job security” for the worker.    A strategy not a policy Over the years and during successive regimes, I have consistently maintained that privatisation is a strategy and not a policy. Yes, it is a strategy through which, in a medium to long-term sense, a government shifts its focus and investment – I repeat, investment money – away from doing what the private sector can do, subject of course to desirable regulation, and instead concentrates on, invests in, and nurtures what it has an obligation to.    Choice of investment A well-designed, privatisation divestment or broad-basing of ownership strategy enables a government to respond to what I term “a choice of investments in the economy”. That choice is driven by overall policy. The rationale for the closure of the state-owned urea fertiliser plant, as discussed in a previous issue, is another compelling example of a failed attempt on the part of the State in venturing into the business of manufacturing fertiliser.     A bad name by default It is more than two decades now that I have mentioned in print and electronic media, that “privatisation” earned a bad name in Sri Lanka among the middle and lower income earner, the voting segment of which can be crucial, due to several tangible reasons, which inter alia include:   
  • Disregard for the politically disseminated negative sentiment
  • Lack of response of the state to such sentiment and the criticism of its process
  • Limited experience on the part of the Government of Sri Lanka (GoSL) in introducing a level of professionalism in the process
  • Irresponsible private sector parties taking advantage of the government
  • Privatisation or divestment not preceded by adequate awareness building and marketing to appropriate stakeholder groups
  • Certain transactions lacked transparency and clarity
  • Methods or rationale adopted have not been consistent 
  • Government valuations and methodologies being questionable
  • Successes have not been profiled
There are many more generic examples, which I will discuss as the article evolves.   [caption id="attachment_94526" align="alignright" width="300"] Ceylon Steel Corporation[/caption] The regrettable outcome The above resulted in misperceptions about the desirability of privatisation in general and distrust in the method adopted for divestment of certain entities in particular. These misperceptions have been further fuelled by the fact that valuations placed on these entities by the Chief Government Valuer at the time of calling for Expressions of Interest have been vastly different from independent valuations of local and overseas bidders at the time of bid or at evaluation or award.    Political opportunism  We must understand that the larger majority of voters are laymen. They are not professionals or business persons – whether small, medium, or large. They form a potent target community for the politician who wishes to fuel misperceptions. For example, political parties, in particular when in opposition, have always maintained that the Chief Government Valuer was correct, and any value obtained which was less has prompted allegations that there was fraud.    Commissions of inquiry Commissions of inquiry have in certain instances been inconclusive and further fuelled misperceptions. Selected privatisation transactions have lost credibility due to lack of overall technical knowledge and delays at the public sector evaluation level, resulting in local and foreign bidders and observers losing confidence in the institutions and the processes adopted by the GoSL.    The buyers’ perspective vs. media reports Successful bidders have also lost credibility in the country due to damaging media reports which are not explained from the buyers’ perspective and inadequate corrective action by the GoSL where such action was due or inaccurate, or incomplete media reports which are not always based on independent financial or industry-specific technical analysis which are misleading to the reader – such readers being both direct employees or interested politicians.   Political pressure and union hostility The above has generated political pressure and union-generated hostility towards privatisation, leading to either delays in awarding the bid or the reluctance on the part of the winning bidder to proceed with making payment and finalising the transaction.    Inadequate preparatory work  Inadequate attention to the possibility of restructuring prior to privatisation or in accepting a bidder’s conditions which are not always in the best interest of the GoSL, have resulted in the GoSL not realising the full potential of privatisation proceeds, while the acquiring party has gained considerable advantage. This has resulted in privatisation policies and strategies including the medium of privatisation and the process of evaluation of bidders being brought into question.   [caption id="attachment_94528" align="alignleft" width="230"] Tea Smallholder factory[/caption] Poor ‘due diligence’ of winning bidders There have also been instances where due to poor techniques adopted by the GoSL in evaluating the credibility and the technical capability of bidders, inappropriate parties have been successful in winning bids and the financial and operational performance of the entity has declined post privatisation. In certain instances, due to union agitation, and to derive political advantage, the Government has taken back the entity!    Noncompliance with bid conditions  In certain instances, the GoSL/PERC have failed to ensure compliance with the conditions regarding terms of payment, and conditions that bidders should submit bid bonds, and have been of no recourse to the bidder in obtaining payments against the agreed upon offer price, when parties have defaulted on settlement of purchase consideration. Two clients of mine were unfairly disadvantaged, but both chose not to pursue my advice that an injunction be brought against the GoSL, restraining the Government from awarding the entity to the ineligible bidder. Had my clients acceded to my request, we may have improved the process.    Absence of national safeguards Events which followed the privatisation of certain entities have also brought into question the adequacy of safeguards necessary from a national perspective, which should have been “built in” at the time of privatisation. For example, this relates to absence of a regulator at the time of privatisation or the ineffectiveness of a regulator subsequent to privatisation. Government nominees on the boards of directors of partly privatised entities have also failed to contribute effectively to safeguarding the interest of the GoSL or to ensure that good governance practices are adopted. These contributed towards the loss of credibility of the programmes of privatisation. These are only a few thoughts and ideas which I have articulated from time to time. May I take the liberty to say that they have been well received by multilateral and bilateral development partners, local and foreign investors, banks, as well as think tanks.    (Across the Years, Beyond the Oceans is a column by Chartered Accountant Ranel Wijesinha to share thoughts and ideas generated by his years of experience in Sri Lanka and beyond the oceans in many parts of the world he has lived and worked)  

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