A good friend surreptitiously came up with an interesting observation on the suggestion, in Part V, to establish a Ministry of profit. According to him, there will be a mad rush to be the minister of profit, within the leadership from top to bottom, and given its perceived dimensions the position may even be more coveted than the prime minister.
Astute as the comment may be, if we can collectively be naïve enough to believe that democracy is evolutionary, what is the harm in assuming that evolution is universally applicable to all fresh thought? Particularly when the concept is already tried and tested by nations who continue to blaze ahead even in a global recession. All the same, this is one of the reasons why it was necessary to further annotate upon the Ministry of Profit.
Previous parts had concluded that profit, quintessential for the state, was the bailiwick of profit-makers who craved unadulterated empowerment. For those who have recently joined the discourse, kindly refer to the table for previous articles published in the Business Recorder.
Recent economic news confirms the hypothesis that the state remains overly protective of the economy and considers it a birthright to intervene in one form or the other. Having been complacent earlier, austerity measures, pursuant to the European crisis, are designed to rein in future market adventures. Ignoring popular dissent, the state rules with an iron hand. The persistent skeptic is advised to scan the last two editions of The Economist which provide proof of state wielding absolute power. For the incessantly lazy, some of the related news is summarised hereunder:
--The French Socialist presidential candidate, if elected, proposes to introduce a 75% tax rate on household income above USD 1.3 million, apparently designed to discourage businesses from paying higher salaries. A sure shot policy to de-motivate the profit-makers. Thinking this through, if the desire to make profit is curtailed, how is the economy expected to grow?
-- The recent endeavours to substitute the CEO of Veolia consolidate the perception that politically connected king-makers rule businesses in France. If the West has remained unable to tackle political interference, why should developing nations throw in the towel?
-- China's largest internet firm, Alibaba Group, frustrated by market expectations, has decided to delist its subsidiary Alibaba.com. Similarly, Korean Chaebol and Japanese Kerietsu remain closely held to pursue their long-term vision without the pressure of appeasing short-term investors. After all which business can continue to beat results every quarter? In recent times, stock markets provide more of an opportunity for investors to placate their gambling instincts through speculation, rather than meeting their primary objective of encouraging long-term investment thereby efficiently allocating capital, as envisaged under the free markets theory. The King is dead, long live the King!
-- Advanced economies have gone back by decades as a result of the global financial crises. Additional proof that the "invisible hand" is just not enough to appropriate or manage national assets. On a lighter note, Pakistan has less of a gap to cover!
-- Central banks continue to keep interest rates depressed thereby ensuring that real returns remain negative in order to facilitate borrowers, to the detriment of depositors. Inflationary pressures are quietly appreciated since this remains the easiest method to reduce national debt. As always the populace pays for the greed of a few and even democratic institutions are unable to protect and insulate the masses.
The point is that if at the end, the buck stops with the State, one way or the other, why should it continue to behave as the proverbial "wolf in sheep's clothing". Would it not be exceedingly beneficial for the state to be involved at the time decisions are made in relation to national assets, compared with post-facto steps for untangling the mess. Sufficient credence for the Ministry of Profit!
Imitation is the best form of flattery. In China the Ministry of Profit (MoP) goes by the abbreviation SASAC, State-Owned Asset and Administration Commission. The central SASAC, there are SASACs at the regional level as well, oversees all major state-owned enterprises (SOEs). To get an idea of the size of state business in China, consider that in 2009 nearly 50% of economic output was attributable to SOEs. This is subsequent to the policy of "Grasp the big and let go of the small". Views on which industries inherently qualify for state control and the related supporting policies will be articulated in later parts of this series. Meanwhile, the focus is on the responsibility of SASAC.
SASAC's website identifies its responsibilities as follows:
1 Supervise and enhance the management of state-owned assets
2 Preservation and increment of the value of state-owned assets
3 Advance the establishment of modern enterprise system in SOEs
4 Appoint and remove top executives
5 Organise the supervised enterprises to turn the state owned capital gains to the State
6 Financial monitoring and guidance on policies, procedures and regulations
Historically, China through the SASAC has successfully exploited SOEs to pursue its economic policies, stimulate activity, channel capital into key industries and regions, acquire foreign technology, improve income distribution and specifically safeguard its national assets.
The key challenge for any entity like MoP/SASAC is separation of ownership from management. Supervision conflicts with day-to-day management, only the extremely pious are capable of self-supervision, if at all. Ideally, the MoP adopts the role of the investor, who monitors professional management. Realistically, impregnable discipline is needed to follow this principle.
In SASACs case SOE management is graded on respective enterprise financial performance. On the other hand career paths are subject to the whims of the political elite. Arguably, the politicians and the bureaucracy can therefore interfere with SOEs; however the leverage to favour cronies, optically at least should be subservient to the satisfactory financial performance of SOEs managed by them.
The Korean model might provide another solution. CEO of SOEs and their pay scales are decided upon by an independent nomination committee. Management performance is also evaluated by outside directors who constitute more than 50% of the Board. In this scenario, the appointment, evaluation and remuneration of independent directors are critical and require meritorious decisions at the MOP level. To clarify, in order to get the best out of independent directors, market remuneration is a must. Nonetheless, completely bisecting supervision and management under this option is also probably improbable.
One proposal can be that the MOP be operated as an authority with say 5 members selected by all the national and provincial pillars of government for a fixed term through a transparent process ensuring that members are renowned businessmen or technocrats only. The authority than elects its own Chairman. Constitutional protection is provided to the MoP including shielding it from government interference. All SOEs should only and directly be answerable to the MoP.
Finally, appointments at MOP should not be considered government service, in fact conversely they be governed by best practice policies and procedures including hiring, firing and pay scales. Similarly, SOEs should by law be banned from complying with government rules and procedures and on the other hand be mandated to adopt best practice procedures and international reporting standards so approved by the MoP.
As in any other case, this is a basic concept for managing national assets and deliberations will surely result in an optimum solution. The key issue is the recognition that national assets need to be proactively managed by the State. The essence of a singular non-political un-bureaucratic entity for managing national assets is unflinching focus on consolidated profit. The practice of various ministries managing their related SOEs is equivalent to not seeing the forest for the trees. By necessity the MoP should be powerful enough to dictate policies for enhancing national assets remaining cognisant of social needs.
With this objective in mind, the next part tackles the authority of MOP.
Comments are welcome.
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PART TITLE DATE
I Profit is sweet 25-Jan-12
II State for profit 7-Feb-12
III The profit-makers 22-Feb-12
IV Prospecting for profit-makers 1-Mar-12
V The profit abode 7-Mar-12
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