Privatization through the stock market

Stabroek News - October 23, 2013 By TarronKhemraj Privatization was seen as one of the reform measures for an economy transitioning from socialism to a marked-based capitalist economy. Today many still hold privatization as an important component of reform. From Russia to Guyana the assets of the state were sold off at significant discounts to a single investor or family. Take for example the sale of Hand-inHand shares to the brother of the head of the government holding company, NICIL, Mr Winston Brassington (see SN report March 27, 2012). This sale was done to a connected family member. We did not see reports indicating that efforts were made to sell the shares to a diversified group of investors. Instead this was a sale to a family member connected to an influential bureaucrat of the government of the day. Single-ownership private investors and family businesses are not obligated to produce regular accounting reports for market analysts to scrutinize. On the other hand, companies traded on a stock exchange must release information to the market on a regular basis. Analysts working in the stock market must obtain information from traded companies so that they can make correct valuations. Cash flow, debt level, balance sheet structure, and profit statements are all crucial documents that a publicly traded company must release on a regular basis. There are numerous examples around the world of situations where the government has sold off shares of public companies to a diversified group of investors. Chinese government-owned companies, for example, are traded in New York, London, Hong Kong and other important centres of global finance. The state-owned Brazilian energy giant Petrobras has shares traded on various stock markets. This is certainly an interesting model of state capitalism. In these instances the government maintains majority ownership; however, there is partial privatization by selling shares to many investors. Of course, some investors are able to buy more shares than some. There are several advantages associated with this model of privatization in the Guyanese context. First, if the National Industrial and Commercial Investments Ltd. (NICIL) decides to adopt this privatization method as a form of public-private partnership, then the Guyanese public by virtue of the work of the stock market analysts will know more about the investment rationale and choices of the government. In other words, there will be significant improvements in government transparency, which can go a long way towards easing suspicions in an ethnically divided society such as Guyana. In addition, no analyst will be required to pay $50,000 for the release of documents that must be made public by law. The Berbice Bridge Company Inc. (BCCI) recently asked Mr Christopher Ram to pay $50,000 for documents that would have been public if BCCI had shares traded on the Guyana Stock Exchange. A market can only function if it is thoroughly regulated by laws that make sure that no participant can have an unfair advantage over another. The stock market will not function when the CEO or the government refuses to provide information. In general, all markets
1

break down and lose credibility when those with inside information take advantage by buying up assets that belong to the people. Moreover, markets will perform poorly when some people have more information than others. Those with the information will erect barriers to entry so that outsiders cannot compete. They will establish an oligarchic system of exploitation as we see in Guyana today. An oligarchic system of capitalism only benefits a few families. Privatization through the market will benefit a wider cross section of Guyanese. Second, this form of privatization can widen the ownership base and help to build the Guyanese middle class. Instead of selling to a single buyer, more Guyanese will be able to share in the ownership of state assets. In a sense, this system socializes the ownership of state assets. We often say a state-owned business belongs to the people. However, this ownership only exists in the abstract. People only become literal owners when they own shares in the state enterprise. Third, a market-based system of privatization will require a large number of economic, financial and industry-specific analysts. These are typically highly motivated, qualified and educated individuals. It requires the University of Guyana to get its act together and train suitable talents. These individuals will have the ability to price financial and physical assets given the information provided by the CEO and the government. The favourable spill over to other sections of the economy can be enormous. This could lead to the re-awakening of the critical thinking class of individuals. Fourth, privatization through the market will discipline state-owned enterprises. Businesses started by the government will have to be transparent and believable. The concocted Marriott hotel would not have been possible under this model. Skilled analysts would report on TV that the assumptions that went into the Marriott are unrealistic and to a large extent crazy. Private investors will therefore stay away from this project and the government will find it hard to raise capital for unrealistic projects. Fifth, the infused market discipline can force the government to establish better privatepublic partnerships. This provides an opportunity for partially privatizing GuySuCo and raising capital for the sugar industry. However, government bureaucrats will have to come up with a credible business plan that involves better agricultural methods, better factory management and a diversified list of products. One question they will need to answer is whether the sugar cane farms can be better run by cooperatives and the factories by publicly traded companies. They will need to get rid of uneducated political types that have occupied the board of state corporations. Otherwise, the market will severely punish the firm. Sixth, as noted earlier this type of privatization can result in a wider ownership of shares in partially privatized state-owned companies. Eventually the government can assume a minority stake in companies once the private sector can buy them out completely or assume majority ownership. This wider ownership can lead to a deeper and more liquid stock market in Guyana. The market can attract inflows of capital from Caribbean long-term investors such as pension funds. However, those responsible for macroeconomic stabilization will have to guard against speculative inflows of hot money. That is why I emphasize inflows from investors who want to hold shares for the long run. The stock market is a major plank of the capital market. Once the stock market is developed, the other plank, the bond market, can emerge so that publicly traded companies can sell debt that can become liquid as the debt security changes hands. Eventually the stock exchange can
2

provide a channel for initial public offerings (IPOs), a situation where new financial capital is raised. Developing the stock market, therefore, can result in financial sector modernization and help to provide an alternative channel of financing other than commercial bank financing. It would also result in the creation of high quality jobs and professions. Imagine the Tiger Bay area can become the financial centre of Guyana and the Caribbean. Think about the favourable spill overs this can engender by transforming the water front of Georgetown. Comments: tkhemraj@ncf.edu (http://www.stabroeknews.com/2013/features/10/23/privatization-stock-market/)