Privatisation is bad, peoplisation is

good

Wednesday, 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. Bs 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 its 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 Marxs 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.)
Posted by Thavam