All state enterprises are not the same; why large-scale privatisation can be detrimental

“Indeed, the government has to find ways to generate some savings, but wholesale attrition of state-owned entities cannot be a forward-looking strategy.

“Especially when looking at them from a profit-loss point of view loses a sense of how some of them may contribute to our recovery and our economic prosperity.”

The following Letter to the Editor on the privatisation of state enterprises was submitted by Keston K. Perry:

Photo: Finance Minister Colm Imbert. (Courtesy Ministry of Finance)
Photo: Finance Minister Colm Imbert.
(Courtesy Ministry of Finance)

There is a common belief among some economists that state-owned enterprises are inherently inefficient. Or that setting them up is a needless way for government to intervene in the economy. This way of looking at them can actually be very limited.

First, the myth that state enterprises are set up to generate a profit is not one reflective of a wider understanding of why the state has a role in the economy.

Some of the main reasons include: to create demand for certain goods and services, especially innovative products; to offer goods that private companies would find it unprofitable to invest in, or if they do it will be significantly beyond the purchasing power of regular citizens; and to utilise and develop certain capabilities among citizens and institutions that can guide government’s thrust for economic transformation.

Indeed, the government has to find ways to generate some savings, but wholesale attrition of state-owned entities cannot be a forward-looking strategy. Especially when looking at them from a profit-loss point of view loses a sense of how some of them may contribute to our recovery and our economic prosperity.

It may be true that many of these entities were used as mechanisms to deliver patronage to groups, and to ensure that governments over the years remained unaccountable. Or in recent times, that unqualified persons were given leadership jobs there in exchange for political party loyalty.

Photo: Then Prime Minister Kamla Persad-Bissessar (left) shakes hands with her successor, Dr Keith Rowley, en route to Nelson Mandela's funeral in South Africa. (Courtesy News.Gov.TT)
Photo: Then Prime Minister Kamla Persad-Bissessar (left) shakes hands with her successor, Dr Keith Rowley, en route to Nelson Mandela’s funeral in South Africa.
(Courtesy News.Gov.TT)

However, the history of the state enterprise sector conveys a slightly different picture.

Since the 1970s, a number of state owned companies were set up or were nationalised by the government both in response to the Black Power Movement and an overall vision by the then Dr Eric Williams-led Government to deliver economic development on behalf of citizens.

Some of these companies included Caroni (1975) Limited, the Caribbean Industrial Research Institute (CARIRI), the Iron and Steel Company of Trinidad and Tobago (ISCOTT later privatised to become Arcellor Mittal), the Telephone Company (TELCO, now the Telecommunications Services of Trinidad and Tobago), the National Gas Company, and First Citizens Bank.

Contrary to popular belief, my research has shown that a number of these companies were at the cutting edge of innovation into the 1980s, acquiring foreign technology, while utilising local resources and capabilities to develop innovations.

Take Caroni (1975) Limited, which was later closed because it was deemed unprofitable and uncompetitive. Even though scientists and engineers at Tate and Lyle, the multinational from whom the Government took over the company, opted to return to the United Kingdom after the company was nationalised, managers decided to develop its own internal resources and capacity.

Photo: A sugar cane worker enjoys a snack on the job. (Courtesy Riomate)
Photo: A sugar cane worker enjoys a snack on the job.
(Courtesy Riomate)

After the exodus of staff, this left the company with bare technical expertise but its managers at the time saw this as an opportunity to carry the company forward. They worked alongside CARIRI in the early 1980s to develop a truck scale management system that used some imported technology and an entire local staff.

This scale technology helped to make important savings from the inaccuracies of weighing sugar done previously by inefficient scales or by manual labour. The technology attracted international attention and demand from other sugar-producing countries but was not carried forward.

The case of ISCOTT is somewhat more controversial given recent developments. However, ISCOTT was a pioneering entity that helped transform the global iron and steel industry in the 1970s.

At that time, it was believed that only large countries could be a reckoning force in the industry because the technologies that were developed required a large-scale operation to produce large volumes of iron ore, billets and steel rods.

However, local expertise with Japanese and European technology transformed the sector and innovated to advance the iron and steel industry in a small country like T&T with significantly smaller volumes that could compete with larger companies. The company however received fierce anti-competitive pressures from US industry, carrying it into the red. It eventually went under.

Photo: Steel tycoon and Indian billionaire Lakshmi Mittal is the owner of ArcelorMittal. (Courtesy Rediff)
Photo: Steel tycoon and Indian billionaire Lakshmi Mittal is the owner of ArcelorMittal.
(Courtesy Rediff)

The technology it developed with international partners and the use of local talent and vision has gone on the transform the sector. As a consequence, ArcellorMittal became one of the largest and most profitable iron and steel companies in the world.

Recent events notwithstanding, if as a country we were able to capture just a small percentage of royalties from our involvement in that innovation, the country might have still been more involved, even just in exporting the technology and creating other spin-off businesses.

TELCO was another atypical state company in the 1980s, where it led the charge in new devices and digital switches with the help of the University of the West Indies and its own internal research and development (R&D) department.

The company developed technology that introduced new services such as International Direct Distance Dialing and Vertical Services—Call Waiting, Call forwarding and Conference Calling. For many of us today, this technology may seem passé but at that time this was a pioneering effort for a small state company in the islands of T&T to be at cutting edge of the telecommunications revolution in the Western Hemisphere.

Later, internal power struggles and a decision by the company’s Chief Executive who was under the influence of a multinational closed the R&D department.

Photo: Still waiting for that call? (Courtesy Frédéric BISSON)
Photo: Still waiting for that call?
(Courtesy Frédéric BISSON)

These stories are just a few examples of state companies being at the forefront of technological innovation. In the final analysis, T&T has had many missed opportunities to generate economic prosperity outside of the energy sector.

If many of our policy makers and company executives were steadfast in taking decisions to pursue and improve upon, export and pivot these companies and technologies, we may have been in better position with respect to diversification.

A hasty approach to privatisation can be self-defeating and more than that loses sight of high value-low profile projects that can generate greater earnings in new sectors for the country in the long run.

The population can only hope we would not repeat mistakes of the past.

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About Keston K Perry

Keston K Perry is a political economist and scholar specialised in development policy, with extensive experience in academia and the public sector. He was recently a postdoctoral scholar at the Fletcher School, Tufts University and holds a PhD in Development Studies from the School of Oriental and African Studies (SOAS), University of London.

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  1. For this to work the mentality of the average Trinidadian working for any government entity has to change a diametric 180 degrees it like once we start working for the government and or any of its entities we do not need to work, you see it everywhere from the civil servants in government offices or those working for WASA of T&TEC etc. So yes if we the average Trini who works in any of those enterprises change our attitudes to make them profitable or at the least break even, like any business you cannot lose money continually or we would have to go out of business.

  2. As soon as the money goes all the bitches take flight !

  3. Hmmmm. Many hypotheses to test but lacks the economic and accounting rigor that will be needed for decision making. Many of those companies produced goods and services at a loss! Many were not able to sustain repeatable quality and on and on. That analysis was done back in 2002-2003. Once these entities are deemed unprofitable then every dollar of subsidy is a dollar taken away from the same constituents they were set up to serve and there leads to underfunding in healthcare, education etc. Also , government is not in the business of business and so they do their best in the way that they know – thus political patronage etc because. Privatization is not a bad strategy across the board. With the exception of the gold crystal sugar none of these companies were known for innovation and leading technology development. Again evaluated between 2002-2003. I think the ideas are a solid start but there has to be a solid economist and accounting assessment done as the decisions cannot be based today on the merits or rationale which existed when the companies were set up 30+ years . Gosh a lot has changed

    • Not sure if Keston K. Perry might want to take you up on that discussion…

    • I can draw your attention to the case of Hyundai in Korea. That company did not become world leading until the 1990s though several sunk investments were made since the 1960s. Indeed, these aspects are not captured by mere accounting exercises, and that ironically is the point made! It requires long-term investment in a number of capabilities over time – several decades…. Can point you to several world leading examples in this respect… but in T&T’s case we thought ten years were sufficient or some of these technologies were trumped by certain short-sighted managerial and policy decisions. Often, technology was not seen as an important consideration (most financial experts and economists do not see technology in a broad sense in these evaluations done in 2002-2003 because not many people knew the whole story beyond profit & loss. I do not suggest we take approaches from 30 years ago lol… I simply suggest that history is an important source of insight and inspiration. This is meant to challenge that very view that technological innovation is about narrow efficiency or only done in the private sector based on decades of research starting in Latin America in the 70s and East Asia from the 1990s. Lots of work to do to change these deep-seated unsubstantiated claims and perceptions about what the state can and cannot/ should or should not do. A firm is a firm, whether state created or privately established.

    • Keston “mere accounting “, you missing the point. Where did that fine from ? A proper assessment cannot be done without proper accounting, economic or financial analysis. Also culture is a factor – I know the Hyundai story well. I gone

    • My interest and focus is technology and innovation — there are many ways to assess that. I take examples that I found that challenge the view that many people think were financial disasters or what they call the ‘Not-Invented-Here’ syndrome. Often, the technological aspects are often not known or part of the discussion or decisions.

    • Technology and innovation MUST include some analysis and if not it’s really just spitting in the wind. How does one know which ideas are workable? Show me one rigorous assessment of any new idea that went to market without the types of analyses I mention. The issue with many of these TT state agencies is exactly that – people said this will work and that will work and no one measured anything. How then do these ideas go to market ?

    • Financial returns to tech are not immediate especially in fast-moving sectors like telecoms/IT or manufacturing. It requires patient capital over a long periods of time. Hence Hyundai among others did not gain profits for a long time after initial investments. But that is a straw man point – as I’m not speaking about the importance of finance. I’m talking about under-recognised technologies that were created in state enterprises. These companies required a long term vision and strategy of building different kinds of capabilities/knowledge to get the most of them but short-sightedness in management and policy and intense battles led to their limited success.

    • Now I’m lost as to where you going. As someone who’s worked with many tech companies in pharma, telecom, energy and done the assessment of new technology designed to go to market I disagree . The market impact and economic viability must be and is always done upfront. They will not invest if the economics aren’t right!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! And they shouldn’t ! Potential for shareholder benefit must be evaluated. That is one difference with the state sector because then the state is investing on behalf of the citizens and the shareholder rigor is lost or not applied. When the minister of finance yesterday spoke of the poor performance of state agencies , that won’t happen without the analyses which I’m referring to. Technology and innovation has to go beyond ideas – they must be viable, workable and have impact or they will not see daylight

    • Bill Lazonick makes interesting points about shareholder value principle re tech innovation. He recently wrote about China’s experience. However, I make two simple points, that these technologies existed and these state firms invested in them and had important capabilities that could have gone further with right vision, strategy and acknowledgement of their importance. That’s all I am talking about here – a narrow reading of the state sector does not show this type of potential.

  4. Thought-provoking, to say the least. But it seems to me that the piece, albeit research-based, reckons without or underestimates the very real power of culture – in the best sense of that word. In the real world, the pure case simply does not exist.

    The power I refer to is hinted at here and there, for instanc,e in this reference (“Later, internal power struggles and a decision by the company’s Chief Executive who was under the influence of a multinational closed the R&D department.”) but there seems to be little acknowledgement that, in a country such as ours, good intentions are very often torpedoed by political expediency or mere political intervention.

    • I am very much aware and totally agree with you Earl. It was a short piece that concentrated different cases that I deal with in more detail elsewhere. In the case of Caroni, it was an aspect of politics, as it was about with R&D-based projects at the university, among several other examples. Many of them were driven underground and never saw the light of day again – or were stopped abruptly. But unfortunately I cannot call names, dates and specific instances, but your presumption is quite correct.

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