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Restoring the SEC's credibility The appointment
of Denis Perera as the new chairman of the markets watchdog, the
Securities and Exchange Commission, appears to be a good choice.
He is likely to require all the skills he has acquired as a general,
diplomat and company chairman to maintain the right balance between
his position as non-executive chairman of the SEC and the SEC Secretariat
which has the executive powers to probe irregularities in the financial
markets, as well as maintain discipline and proper conduct on the
part of the other commissioners. Perera has
the tough job of heading the SEC at a time when its public image
has been battered and it has to regain the lost confidence of investors,
particularly those small investors who look upon the authorities
to provide them the protection against the big sharks known to roam
the turbulent waters of the financial markets. It is the millions
of small investors who will eventually have to provide the required
depth to the markets and whose investments in shares and other instruments
will make this island a true share owning democracy. These people
are unlikely to take the risk of investing their hard-earned money
in shares if they do not have faith in the institutions that are
supposed to protect their interests, ensure the orderly conduct
of the market and crack down on irregularities. They will no doubt
be heartened by the enhanced powers given to the SEC under the new
amendments to the SEC Act. Although the stock broking community
has opposed many of the amendments and enhanced powers of the SEC
Secretariat, saying that they are too wide and intrusive, the fact
remains that the government thought it fit to go ahead with the
move which is also a way of reassuring the investing public. Perera's last
position in the corporate world was a non-executive one, unlike
his predecessors as well as fellow commissioners many of whom were
and are powerful figures in the island's tiny business community
and held and enjoyed executive positions. Perhaps it was the perks
and privileges some of these gentlemen enjoyed that made it difficult
for them to maintain the impartiality and aloofness required of
them in their role as members of the watchdog organisation and made
them act as if the market was their private preserve. The decision
to appoint Perera as the SEC chairman and to advertise the post
of director general of the SEC also means that at least for the
time being the government has decided to maintain the two as separate
positions, despite the complications that could arise as demonstrated
by the insider dealing fiasco. The two jobs are combined and the
positions held by the same person in many other jurisdictions. The
establishment of a Financial Services Authority under which organisations
like the SEC would come might be an appropriate time for the government
and the markets to rethink their positions on this issue and make
any necessary changes. Investors still remain concerned about the conflict of interest involving those commissioners who insist on remaining as members of the commission while publicly disagreeing with its decision to prosecute the former SEC chairman Michael Mack. There have been calls for the resignation or removal of those commissioners such as Cubby Wijetunge, who have openly challenged the Attorney General's Department's opinion on the issue and the SEC decision to prosecute Mack. Another concern is that the gag imposed on members of the SEC Secretariat remains in place despite that fact that the modern business world is moving into a more transparent era, driven by the corporate scandals that have shattered investor confidence in more mature and developed markets. Sale or reform of Insurance Corp? By D.
B. Nihalsingha President Chandrika
Kumaratunga's recent Independence Day message stated: "We have
failed in the essential task of nation building…we have failed
to build on our strengths and evolve into a modern, independent
pluralistic nation…...the failure to address [the conflict]
in the past years has metamorphosed [into] the most brutal and destructive
[war] this generation has experienced." This is an indictment
on all governments which have been unable to end a devastating,
wanton, purposeless civil war which has displaced a million people,
with an economic cost to the country between 1983 and 1996 of some
$4.2 billion (or Rs. 403,200 million), which has eroded most if
not all past gains in education and health, robbed the country of
its prospects of progress, and has bled it so profusely that its
coffers are dry. It's a country on its knees, on the brink of a
failed state. Such a country will have few choices in finding funding
to fill up the government coffers. Privatization
of state ventures, plodding along thus far, is once again being
prodded into action, with several state enterprises targeted to
be sold off. The upcoming privatization of the Insurance Corporation
of Sri Lanka Limited (ICSL) possibly is in this context. Because privatization
rhetoric has drowned out deeper evaluation of 'government in business',
this article proposes to restate the basis of state enterprise and
examine alongside the very special features of the ICSL - attributes
which are unique to it and which makes it not a merely a state business
venture but an organization on national scale besides being a unique
reservoir of consumer experience, embedded with a public purpose
as well as an enterprise one. Thus, if that enterprise is found
to be wanting, what is the deficiency which cannot be remedied by
reform and for which the only solution is disposal? Why should "business of government include government businesses"? The factors are manifold: most governments all over world, including developed and developing have been involved in economic enterprise and intervention. Without such involvement, economic development would have languished, the massive investments in contexts where capital was lacking, could never have taken place. For example, in the United States as in Australia and Canada, railways which formed the backbone of early infrastructure, was government backed. In many countries of Asia, particularly in Singapore, Taiwan, Korea and Malaysia, government involvement in and backing of enterprises was the backbone of growth. (A government enterprise well known to Sri Lankans would no doubt be Singapore Airlines). Less well known successful state enterprises abound in East Asia. The post-independent period in Sri Lanka did not have a vibrant private sector with significant entrepreneurial initiative. Without considerable government involvement, the entire development push would have been sluggish. The pursuit of profit, which Alan Greenspan described as a "natural inclination of humanity" certainly did not trigger a resurgence of capitalism in Sri Lanka. There were other
factors besides lack of entrepreneurial flair: the Soviet propaganda
of socialism as fantastically successful on the basis of bogus statistics
of industrial production projected an utopia which mesmerized Sri
Lankan leaders along with the influence of Fabian socialist ideals;
the Indian influence of Nehru proclaiming heavy industry being "Temples
of modern India". These and many other factors no doubt played
major roles. In its heyday,
state enterprises came to involve some 29 % of the economy. Once
set up, no government rolled back the enterprises so set up until
1977. Still the government which proclaimed that roll back did not
commence the process until 1983. Even then, the initiatives were
slow, cumbersome and ponderous. Where privatization took place,
there were serious doubts about its transparency. Ironically, it
was left to the government of 1994 to carry on the privatization
with greater vigour than the proponents of it. The wide gap
between precept of privatization and the sluggish practice of it
had some reason. Perhaps governments were sensitive to the close
rapport between Sri Lankans and state enterprises and the close
links with the day to day lives of the people through their wide
spread branch networks, whether they be in the form of Bank of Ceylon
or People’s Bank, or the widespread penetration of the insurance
scene by the ICSL or by the Building Materials Corporation. As W.D.
Lakshman in Dilemmas of Development, 1997, put it, "There is
an opinion that public enterprises are necessary in some areas of
the economy… There was a long tradition of public enterprises
in the country. Even after about a decade long privatization programme,
proposals to privatize still generate popular antagonism." Thus, once
set up state enterprises came to be deeply ingrained in the lives
of the people. They came to fulfill the twin role of performing
a societal function along side its business function. President
Roosevelt famously put it when launching the Tennessee Valley Authority:
"a corporation clothed with the power of government but possessed
of the flexibility of a private enterprise." Professor Ramanadham
in The Nature of Public Enterprise, 1984, recognized and stressed
the twin public and enterprise aspects as essential characteristics
of state enterprise. The enterprise trait, the striving for profit,
is an attribute shared with private enterprise. Concurrently, there
is also a public characteristic that denotes societal objectives
that goes beyond profit. The public
sector is therefore a part of the community structure and societal
culture. In this role, governments of most countries, the developed
and the developing, have used public enterprises "as an instrument
of public policy in the process of their natural development. Their
role in the promotion development strategy is critical to national
development." (United Nations Seminar, New Delhi, 1989). While it is
the existence of the two traits of the "public" purpose
and the "enterprise" element that gives state enterprise
a special character, they are also the source of the problems which
are often associated with state enterprise: their alleged lack of
efficacy, inefficiency, waste and deficiency of purpose. Galal in
Public Enterprise, 9(2)1989, summarized these as : the consequence
which arise from the inevitable "clash" of the two objectives
of social purpose and enterprise (profit); "The plurality of
principals" - the existence of a number of entities to whom
the enterprises have to report to; the inability to attract and
retain skilled managers; being subject to political meddling, and
being used for patronage and as employment sources for politicians
supporters. How they
perform This results
in (typical) views held in some quarters, as in the study by the
United Nations reproduced in Public Enterprise, 6 (3), 1985, that
"state enterprises tend to degenerate into bureaucratic inefficiency
and inertia. In many countries they are viewed as residual employers
and are frequently over manned. Political patronage rather than
efficiency considerations often determine appointments." Because
of these views, state sector enterprises have been subject to attack
as being inefficient, wasteful, incompetent, ineffective and so
on. It is evident that a large number of public enterprises, ICSL
included, have been wastefully and inefficiently managed in the
past, traits which are not absent in the private sector. Because of
the alleged deficiencies of state enterprises, and World Bank/IMF
pressure, governments followed the example of Margaret Thatcher
of Britain in the 1980's and began to divest state enterprises.
The roll back of the state and state enterprise as a part of that
process was egged on by world financial institutions which makes
up the 'Washington Consensus', pushing privatization, liberalization
and free markets as essential tripods of economic development. The
mantra has been used in emerging economies as well as in Sri Lanka
as a precondition to life sustaining, continuing standby loans of
the IMF. Such divestiture has become extensive. However, though
state enterprises have been greatly reduced, they continue to be
significant in the developing world as well as in Sri Lanka. A study by
Galal, et al in a World Bank publication, Welfare of Selling Public
Enterprises, 1994, found that the large and growing body of literature
on public-private differences relating to large scale enterprises
"gives surprisingly little support to the conventional wisdom
that private enterprises generally produce more efficiently than
public enterprises." Previously, Jones and Papanek in Government
and Public Enterpise, 1983, had pointed out "accounting losses
are highly superficial and misleading indicator of public sector
efficiency", suggesting that this is one factor which leads
to "allusions of inefficiency." According to them the
difficulties in evaluation lie in the immediate problem that the
private sector criterion of profit does not apply for many reasons,
such as subsidies, lower cost inputs, prices which are not profit
inclusive. This results in the profit factor, if at all present,
not relating to the private sector criterion. In any event, the
social objectives impinge on any calculations of profit (if they
occur at all) to the extent that "…Accounting profits
do not reflect social costs and benefits." (Jones and Papanek). The difficult
outcomes relating to state enterprise performance apart, all or
most of which are lost on the IMF and the World Bank, there is also
a fundamental question of whether the state sector enterprises should
be run on purely commercial lines, thus negating its purpose. Rainey
in Understanding and Managing Public Organizations, 1997, stressed
that "A purely economic rationale for government [enterprise],
ignores the many political and social justifications for government
enterprise". The attempt
to measure the enterprise aspect of a state enterprise, in the ICSL
case for example, results in a partial, if not distorted, quantitative
evaluation of the performance in a context where it was never meant
to be so evaluated without the other societal aspects being assessed
as well. (This is the first part of a two-part series on privatising the Insurance Corporation.) By Mangala
Perera Liquidity Safety The opposite
but equally important risk is that the safest investments such as
government treasury bonds may not provide enough growth or income
to offset the impact of inflation. Return Other tips Avoid speculating. Do some homework about the risks of investing in the share market. Risk is the chance you take of making or losing money on your investment. The greater the risk, the more you stand to gain or lose. Low-risk investments, such as government bonds, guarantee that you'll get your money back, plus interest. High-risk investments, such as stock in a new company, have no guarantees. But if the company succeeds, your investment could someday be worth lots of money. Take a long-term view of your investment. Avoid reacting to short-term pressure and expect some volatility in the market. Identify quality shares in a growth sector. Look for good quality management in industries likely to grow in the future. Don't put all the eggs in one basket; diversify your portfolio to spread your risks. In simple words buy shares in different sectors of the economy (financial, plantation, manufacturing, hotels etc). This should ideally include about 10 stocks. Less than 10 are not enough diversification and more than 15 is too hard to handle. Remember that the strength of the financial markets is never the results of how or how poorly a single investment does, but how a range of different ones perform over a period of time Monitor your portfolio as closely as possible on the performance of the companies you are investing. Consider the following: - Earnings per share dividend per share and payout ratios. -Profitability. Changes in the return on equity (ROE) over time can be identified and analyzed. - Financial strength. - Share price performance. - Price/Earning ratios should be compared across the companies concerned. - Analysis of individual companies' strengths and weaknesses. Seek professional advice from a qualified stockbroker especially first time investors. My advice is simple, look at companies that have the qualities rather than a marketing plan that has little chance of bearing fruit and invest some time as well, and look for quality management in quality companies with potential for earnings growth. |
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