24th Anniversary of The Daily Star (Part 1)

Privatising government owned enterprises

Illustration: Internet

Following the worldwide pattern of a limited role of government in industrial and commercial activities and divesting of government owned enterprises into private hands; Bangladesh too has been doing this for decades. Nevertheless, by now it is more or less a common wisdom that the Privatisation Commission, the statutory body responsible for steering privatisation in Bangladesh is sitting like a lame duck. During the 22 years of the combined existence of the Privatisation Board (the predecessor of the Privatisation Commission) and the Privatisation Commission, less than 80 state owned enterprises (SOEs) have been privatised. 
Where SOEs have been privatised, allegations of undervaluation of its assets galore and it is particularly well-known that vesting the ownership of SOEs to their preferred private groups was a common technique of creating a political class favourable to the military rulers in this country. It is also well documented that many of the privatised enterprises have been closed down by their owners following their de-nationalisation, destroying workers' jobs and making no real contribution to an effective management of the businesses. A study report on privatised industries in Bangladesh conducted by the Privatisation Commission in 2010 found that only 59 percent of the privatised entities were in operation after their privatisations and 20 percent of them were permanently closed down – implying lack of planning or business motivation of their private owners.
Now that in 2014 the government declared that SOEs would not be handed over to private owners by direct selling, a viable way for ensuring greater accountability of the management of the SOEs and minimising the government's exposure to commercial activities can be to ensure the offloading of shares of SOEs. The offloading of shares in an SOE, unless it involves more than 50 percent of its shares, does not divest the government of the control over the enterprise. But such offloading of shares in SOEs can help enterprises to be leaner, nimbler, more accountable, and more competitive. Generally, the interest of the management of an SOE is not aligned with the performance of the enterprise and this trouble can be reduced by including the private shareholders in the board of the enterprise after offloading of shares takes place. 
Offloading of shares can also inject capital into an enterprise which may be used for the necessary expansion of its operation without draining the public coffer. The higher rate of non-performing loans in state owned banks compared to their private counterparts would be testament to the comparative lack of accountability and efficiency of the management of SOEs. The commitment to cater for the needs of customers also varies between fully owned government enterprises and enterprises which are fully or partially owned by private entities. 
An advantage of offloading of a percentage of shares in the SOEs is that unlike their complete selling, this may have a less drastic effect on the wages and other conditions of work of employees of the enterprise and may face less antagonism from them. A comparative advantage of offloading shares of SOEs over the outright sale of enterprises is that the valuation in this case would generally be more market driven and thus, the scope for manipulating the valuation of the enterprises is much more restrained. The offloading of shares of SOEs is also important from the viewpoint of investors in the stock market. It can boost the supply of quality shares in the capital market and play a role in stemming the overheating of the stock market. The offloading of less than controlling shares of an SOE can also allow the government a chance of experimentation with its management mechanism and decide on the pros and cons of its eventual disinvestment in private hands.

Photo: Internet

The progress of offloading shares of SOEs is bleak in Bangladesh. Sometimes the Privatisation Commission has taken the decision to offload shares of an SOE, but due to the non-cooperation of the management of the concerned enterprise or the relevant Ministry controlling the enterprise, the process has not occurred for a very long time. A state-owned company, Teletalk can be a prime example of this type of long delay. As per the statement of the then Minister for Finance and Planning made in the Parliament in June 2005, a decision in principle, to offload shares of Teletalk was taken at the time. Ministers of the current regime have at various points of time reiterated their desire to proceed with this decision but it still remains to be implemented. The offloading of government held shares in multinational corporations in Bangladesh has also not gained any momentum. 
The Privatisation Policy, 2007 entrusts the Privatisation Commission with the responsibility to steer the process of privatisation of SOEs. However, despite this mandate, the Privatisation Commission, with its unremitting deficiency in manpower has not been able to perform its functions as a statutory body to any satisfactory degree as is epitomised by its admission of the slow pace of privatisation. It is not just the lack of steam in the process, but also an apparent lack of co-ordination between the Privatisation Commission on the one hand and the SOEs and the relevant Ministries on the other which is quite worrying. In other words, if there were any reasoned policy considerations (such as a better prospect of profit making through re-design or some sort of structural reform or simply some sort of preponderant public interest justifying the continuance of an SOE in its existing structure despite its economic inefficiency) stymieing the process of offloading the shares of SOEs, that could have been welcomed. However, such diagnostic factors based analysis seems to be absent in the process. 
While the concern of investors giving them a cold shoulder or the securities regulator not approving their proposed initial public offering (IPO) may inhibit the non-profitable SOEs from offloading shares through IPOs; the reason of other SOEs do not appear to be driven by any consideration of justifiable economic reasons. In fact, as many investors in the stock market suffer from the syndrome of irrational exuberance about IPOs and are guided by perception rather than sound financial consideration; in any case, loss making companies are not and should not be allowed by the securities regulator to raise capital by offloading their shares to ordinary investors. Many financial analysts have observed that any IPO of quality shares of substantial volume have been a rarity in the stock market of Bangladesh. And the offloading of shares by SOEs can be a welcome exception to that. 
The government has decided to form a new authority, possibly to be named 'Bangladesh Investment and Industrial Development Authority', replacing the existing Board of Investment and Privatisation Commission. It is expected that the proposed body would act to bring vitality in drawing more foreign direct investment to Bangladesh. Whether or not this objective would be materialised is an uncertain proposition. However, it is quite certain that without removing the bureaucratic red tapes, the restructuring of the Privatisation Commission would have limited impact on the process of offloading of shares in SOEs. It would be apparent that despite granting greater powers to the Privatisation Commission than its predecessor, there has not been any significant advancement in its performance. 
Offloading of shares of SOEs, in one way or the other would, mean limiting the sphere of powers of the public servants. For this reason, unless the political leadership can dictate the process and push it through, the bureaucracy would naturally try to engage in dithering and delaying tactics. As Thomas L. Friedman, an acclaimed author has written, “If horses could have voted, there would never have been cars,” the political leadership of this country would have to force the unwilling horses (the management of SOEs) to make way for the much more efficient cars (a management structure in SOEs where private owners would be a part - be that a controlling or simply a sizeable one). 

The writer is an Assistant Professor at School of Law, BRAC University.


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