How can we reform state enterprises with empathy?
TSTT has let go of 500 people. Last week, the Central Bank announced the sale of Clico and British American’s insurance assets. This follows the closure of Petrotrin’s refinery and the announced upcoming sale of CL Financial’s Omani methanol plant. Could this be the start of even greater reform of our state enterprises; and of a changed role for the State?
Many smart people in the country have called for reform. Take our state enterprises – there are more than 117 of them. In 2017, the government spent about $2.6 billion to subsidise them. The problem is worsening: this is up from $250 million in 2003. Among utilities, WASA accounts for 55 per cent of the operating deficit, and TTEC 25 per cent. NP has run deficits in 11 out of 18 years. And the proportion of their debt compared to their cashflows is increasing year on year.
Yet talk of efficiency rings hollow for the thousands of people whose jobs are affected. Among them are many good, hard-working people. The government is cushioning the blow with severance packages. But given the impact on so many lives, what is the case for more reform? How can we make reform more inclusive and build broad support?
The benefits are broad-based. In the case of privatisation, the government can collect an upfront windfall which it can use to reduce debt or taxes; or invest in roads, hospitals or schools. In the case of a restructuring or sale of a loss-making enterprise, this reduces the burden of subsidies and frees up money to be used elsewhere.
Economic growth remains the single most important driver of prosperity. Discussion has focused on efficiency, but less is said about the potential for newly restructured firms to drive growth. More focussed and productive companies eventually end up generating sustainable jobs as they grow. Well-run companies like NGC and Powergen are just two examples. Taxpayers and retrenched workers can both benefit.
A classic 1994 study by Ahmed Galal compared the actual post-privatisation performance of 12 large firms in the airlines and utilities industry in Britain, Chile, Malaysia, and Mexico to the trend if they were not privatised. The gains were on average 26 per cent of the firms’ pre-divestiture sales.
As reform accelerates, how can we make it inclusive? Firstly, we can match as many people as possible with existing job openings. The Ministry of Labour already has a database of open jobs. More companies could be encouraged to sign on. The state and private sector could work together to match employees to new jobs and provide counselling. World Bank assessments going back to the nineties support this.
There is a long tradition of the best public-sector employees (from Petrotrin, for example) going on to senior positions in multinational energy companies. The energy sector, manufacturers and private conglomerates are well placed to anchor this effort.
Some former employees could even be the foundation of a new generation of entrepreneurs. They should be connected to the resources already available. Republic Bank’s workshops for Petrotrin employees are a good example.
So what is the economic consensus on reform? Saul Estrin and Adeline Pelletier at the World Bank have surveyed privatisation across countries. The data suggests that benefits are mainly derived from complete privatisation. A partial change from state to private ownership has little effect on long-run productivity growth.
Of course, some level of state involvement may be necessary to preserve national interests in strategic, resource generating industries. The NGC is again a good example.
Timing is also critical. If buyers know that the seller is desperate for ready cash – and has a poor asset for sale – the price will be worse. Far better to reform existing enterprises first–as the government has been doing–and then offer them for sale.
Overall, data across several countries has shown that transparency and open bidding is critical to obtain the best price. Sales to high-quality foreign firms result in the biggest positive impact to economic growth. And either competition or effective regulation is needed to see the benefits from privatisation.
That said, there are trade-offs. Capital ownership by as many people as possible is important to tackle inequality, as Thomas Piketty points out in Capital in the 21st Century. Privatisation by way of local share offerings balances equity with growth.
We should add to the momentum and press on with reform. If we can do so with empathy and a spirit of solidarity, we will all benefit.
Kiran Mathur Mohammed is a social entrepreneur, economist and businessman. He is a former banker, and a graduate of the University of Edinburgh.