Privatisation and BOT: Why Context Matters

Privatisation has been at the centre of debates during the past week starting with the demonstrations organized by the unions in the street of Port Louis and culminating with the adoption of the Build, Operate and Transfer Bill in Parliament on Tuesday last. The demonstrations were rather well attended from what we gather from press reports and union leaders have enjoyed the support of prominent members of “civil society”. Although these popular protests seemed to be directed at the specific cases of the proposed privatisation of the Central Water Authority (CWA) and the Cargo Handling Corporation (CHC), the message has clearly been conveyed that the protesters are generally against the very notion of privatisation of hitherto publicly run services.

As coincidence would have it, the Build, Operate and Transfer Bill (BOT) has come to Parliament on this very first session after recess and has gone through a second and third reading on the same day. There could not be any clearer sign of the urgency with which the government intends to get this new mode of financing of national infrastructure projects in operation. BOT, it must perhaps be stated for the uninitiated, is a form of privatisation under which services which have been traditionally provided “freely” by the government are now charged for by a private entity. The private sector companies, which invest in such projects, expect to obtain a fair return on their investments from the users of the service which is being provided.

In the case of highways, for example, the revenue stream for the investor comes from road tolls paid by the users. It must also be mentioned that there have been attempts at operationalizing the concept in the recent past and a “BOT Unit” had even been set up within the confines of some ministry with the specific mission of facilitating the implementation of this mode of financing. For some obscure reasons this unit never seemed to have taken off.

Privatisation of State Owned Enterprises (SOEs) – a description more appropriate than parastatal bodies because it restricts itself to entities which are involved in commercial operations – is generally justified by its supporters on two basic grounds. The first is that the government should sell assets in order to raise money to reduce persisting budget deficits. The second is the belief that transfer of the assets of the entity to private ownership will result in a more effective and productive use of those assets. The Iron Lady, late Margaret Thatcher invoked a third reason, which was the creation of a widespread class of small shareholders having a stake in the economic performance of the large privatised enterprises. In practice though, this has proven to be more easily said than done.

We shall undertake in the rest of this article to analyse each of the above arguments in favour of privatisation in the context of the Mauritian experience – its history, political economy and present economic structure.

Selling government-owned productive assets in order to fund, however persistent, budget deficits is a weak argument. It is akin to the proverbial selling of “family jewels” in order to meet temporary setbacks for a family. Budget deficits are fought through improved control over revenue and expenditure, the more rational use of fiscal instruments or by increasing economic buoyancy thus bringing in more revenue within the existing tax structures. Arguably even the fiercest proponents of privatisation would agree that such a one-off solution to structurally-induced budget deficits is a non-starter although it does provide a popularly palatable argument.

If we dismiss the argument about “popular capitalism” as a well-intended but hopeless hubris, we are left with the single most serious reason for privatisation: those assets under private ownership are automatically more productive because private owners would use them more efficiently. This axiom is based on the Property Rights Hypothesis, which suggests that property is transferable (marketable) under private ownership as opposed to public ownership. It is because of the constant threat of take-over by competing firms that managers in private companies are driven to maximize revenue from the assets under their control. In micro-economic literature this is what is defined as the market for corporate control.

In Mauritius, for obvious historical reasons, the structure of the dominant “capitalist” sector remains controlled by family-owned companies and kinship. In fact there has hardly ever been any public and “hostile take-over” battles to speak of. Mergers and acquisitions when they have occurred have been mostly settled in backdoor negotiations between two or more families, when not among members of the same family. In such a context in which any privatised enterprise will not necessarily have to face the rigours of market discipline, particularly in the market for corporate control, the argument of “automatic” gain in efficiency in the use of privatised entities becomes rather tenuous.

Furthermore, even in more mature and advanced capitalist societies where the markets do constrain the behaviour of firms, the entities that have been privatised are mostly those which are operating under conditions of monopoly. The sheer transfer of ownership of a government monopoly to a private one and expecting that this will lead to gains in productive efficiency and improved prices and service delivery is an “act of faith” which only the most dogmatic supporter of free market economy is willing to undertake. In those mature capitalist systems research has shown that either the introduction of new players (competition) as in electricity distribution and telecoms or the setting up of a strict and effective sectorial regulatory framework are essential conditions for the eventual realization of the objectives of improved productivity.

In Mauritius, the most prominent State Owned Enterprises (Mauritius Telecom, CWA, Cargo Handling Corporation, Mauritius Ports Authority or the CEB) happen to be in what are defined as “essential services” – a euphemism for strategically important and nationally significant operations for economic development AND the welfare of the population. These are precisely the entities which are under the “threat” of privatisation. It is an indisputable fact that, given the strategic nature of these enterprises, their governance structures and productivity are an essential element of the future well-being of the nation. The question which therefore arises is whether privatisation is the only solution to the admittedly rather poor performance of SOEs generally in delivering on their missions? (With significant exceptions such as the SICOM and a few others which have been “corporatised”).

It is arguable that in the Mauritius context, as described above, the essential argument of necessarily improved efficiency resulting from privatisation is far from axiomatic. Furthermore the historical development of the country and the formal structure of power relations between the State and the corporate sector as partners in development rest on a number of considerations and externalities. The ideological, historical and practical contexts in which the move to a more liberal and open economy is being carried out need to be taken into account so that the problems faced are not underestimated and result in even more serious social discontent and an increased sense of disempowerment among stakeholders other than the corporate sector.

*  Published in print edition on 1 April 2016