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Editorial: Good idea to divest via stock market

Published:Wednesday | November 4, 2015 | 11:00 AM

That the Government is considering divesting some of its assets via the Jamaica Stock Exchange resonates with this newspaper, as it likely will with most people. That's because the idea makes sense, beyond the fact that the market is now bullish and trading at record highs, as the finance minister, Peter Phillips, reminded yesterday.

It is worth reminding ourselves why the Government is being forced to sell companies and other assets. In the first place, the State has no place, but for very exceptional circumstances, running commercial enterprises, competing with the private sector. That stifles investment, innovation and entrepreneurship, which, ultimately, undermines job creation and economic growth.

Further, even when they are monopolies, they tend to generate huge losses, as was the case with the government-owned Jamaica Public Service Company, the light and power company, and as largely continues with Jamaica Urban Transit Company and the National Water Commission. That, too, was the case with the Jamaica Railway Corporation, before it was put out of misery with closure.

Two things, by and large, account for this: One is that politicians are often afraid of charging the economic price for goods and services provided by state enterprises. The other is that the bureaucrats who run them have little incentive to innovate. After all, they can always push their hands into the pockets of taxpayers for the money with which to cover their deficits.

This approach to enterprise contributed to Jamaica's accumulation of a national debt that was near to 150 per cent of gross domestic product (GDP) and the demand for a tough programme of fiscal consolidation under the Government's agreement with the International Monetary Fund. The project has included the divestment of some assets, like the loss-making state sugar company, the Kingston Container Terminal, and soon, the Norman Manley International Airport.

 

Model for divestment

 

This fiscal unburdening has contributed to a near-balanced government budget and the reduction of the debt-to-GDP ratio by nearly 20 percentage points over the past four years.

But when the Jamaican Government has sold assets, it has been mostly by public tender, involving a handful of bidders, with which we have no problem.

However, it is not the only model for divestment. Three decades ago, for instance, the Government's first go, during the Seaga administration, at the selling of National Commercial Bank and Caribbean Cement Company was via the stock exchange. That was in the wake of Margaret Thatcher going the same route with her sell-off of state enterprises in Britain.

In Jamaica, as in Britain, it opened the market to a new class of shareholders - small investors who might otherwise have not contemplated the stock market as an option or believed that they could have a place there. Further, it was, and can be, a stimulus to the market, helping to bring new, investable capital to firms.

Creatively used, there are also other potential values to Government by conducting divestments via the stock exchange. Take, for instance, recent wage negotiations with public-sector employees. The administration might have been able to offer workers stocks/equity in listed companies in lieu of increased pay, lessening cash demand on the Budget.