The recent take-over Act has been a hot topic since it was first mooted and it continues to generate impassioned debate from opponents and proponents alike. Governments around the world have a long history of participating in the private sector from the provision of land for industrial zones and parks (like the UAE, South Korea, China) to actively running profitable (and sometimes unprofitable) state enterprises.
The Act’s stated purpose is to ensure that it “preserves and protects public property and to combat misuse and waste”. A high profile example is the Hilton Colombo, which has generated lots of press. Looking at the balance sheet, the hotel made a Rs 1.2 billion loss in the last financial year. At a time when tourist arrivals are significantly up and consumer confidence is at an unprecedented high (not to mention the amazing Hilton buffet), it doesn’t translate in many minds as to why a landmark hotel is making a loss. Some commentators have suggested that the fact that the land is government owned and the hotel is making a loss, translates to a lower corporate tax receipts to the exchequer. Consequently it is an opportunity cost on the government’s books. The debate surrounding this acquisition continues and will do so for some time to come.
Looking beyond Sri Lanka, governments around the globe have in the recent past exercised step-in rights. The nationalization of the British banking system now means that the taxpayer is the single largest shareholder of once private sector banks includig RBS, Northern Rock and even Lloyds TSB. The US government, through the Federal Reserve (a bastion of capitalist ideology) is the largest shareholder Citi Bank and absorbed the losses of numerous mortgage providers including Fannie Mae and Freddie Mac. In these situations governments were expected to rescue failed enterprises once it was too late. Consequently, the government’s argument seeks to stop this before it’s too late.
From a public policy viewpoint it is paramount that any government authority that is responsible for any property acquired under the Act, be efficient, transparent and accountable to the taxpayer. A good example of such a regime would be to look at Singapore’s state run enterprises, which have stringent accountability measures and market productivity offsets. Famously when Lee Kwan Yew set up Singapore Airlines, it had a mandate to make profits from day one. This requirement meant that despite being public servants, top management had to deliver quantifiable results that meant making returns to its largest shareholder, the Government of Singapore.
A good example of how short our memories are was the “renationalization” of Air New Zealand in 2001, which was privately held for a period of 12 years prior to. At the time the government took an 83% stake in the company and unveiled an NZ$885 milion (US$354 million) taxpayer-funded package to save the ailing airline. The reasoning was very similar to the Sri Lankan Act, and the New Zealand government justified it on the basis that a poorly run national carrier would affect the country's lucrative tourism industry, which provides jobs for about 15% of the population. This was done despite Singapore Airlines' stake in the airline shrinking from 25% to 4.3%, and another major shareholder’s stake was cut from 30% to just 5.2%.What did this mean for profits? Air New Zealand returned to profitability in 2003, reporting a net profit of $NZ165.7 million for that year, and has continued to fare well in a very competitive market, despite this years devastating earthquake in Christchurch which translated into a lower profit outlook.
It’s evident that the Act will lead to further debate and continue to generate headlines. As with all things, this is a matter of time, where decisions will be made and outcomes achieved.
(The writers are involved in the investment consultancy industry) |
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