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Politically-connected firms
Analysts have, post-Arab Spring, conducted a uniquely detailed study of the damage that crony capitalism does to an economy. In Egypt for example, it has been estimated, that 60% of all profits generated by businesses were raked off by politically-connected firms. But surprisingly, their share of the economic cake was far smaller and in fact provided only 11% of employment in the private enterprise sector.
In the Arab countries subject to the Arab Spring effect, politically-connected firms were surprisingly lucky in having non-tariff trade barriers being imposed to protect their businesses. It has been estimated, based on research, that around 71% of politically-connected firms were protected in this manner, by a minimum of three such barriers, protecting their business from imported competition.
Lucrative concessions on energy costs were one chosen way of the politicians to protect their cronies. In those countries 45% of politically-connected firms operated in high energy-consuming industries.
In Tunisia the cronies concentrated on the lucrative telecoms and air transport sectors. Entry into the sector was controlled and regulated to limit the competition.
In 2010 these two sectors computed 21% of all the profits made by businesses in Tunisia. Yet the two sectors constituted only 3% of private sector output and provided only 1% of jobs. They had far higher profits and market share than non crony firms in industries entry into which was controlled.
Camouflaged business and enterprise
The situation post Arab Spring unfortunately seems no better. In Egypt, the military is spreading its tentacles into business, emulating the military oligarchies in Thailand and Pakistan.
This seems the path which ‘camouflaged business and enterprise’ is taking in many countries; getting into many labour intensive, lucrative sectors such as infrastructure, leisure and restaurants, to absorb underemployed uniformed personnel who would otherwise be idling.
This results in a huge misallocation and waste of taxpayers’ money and a crowding-out of private enterprise, which would do a better job more efficiently and at competitive prices.
Ambani empire
In India this issue of crony capitalism had been raised. The patriarch of the Ambani empire, Dhirubai, was so famous for succeeding against the odds, in the highly-regulated ‘permit raj’ that a block buster film – ‘Guru’ – was made starring Abhishek Bhachchan and Aishwarya Rai. His sons carry on the tradition.
India’s Central Bureau of Investigation (CBI) recently initiated a preliminary inquiry to probe whether India’s Insurance Regulatory and Reliance Authority (IRDA) unfairly favoured Anil Dhirubai Ambani’s Group Reliance General Insurance Company while levying a Rs. 20 lakh penalty for ‘unauthorised’ sale of health cover. They are looking at the circumstances under which the penalty was brought down from a possible Rs. 17,500 crore.
Ambani’s Reliance Industries had been demanding higher prices from the Government for natural gas extracted from their concession off India’s eastern coast, saying that costs had gone up in an unexpected manner. The Modi Government raised prices, but the company said it was not enough. Reliance had launched arbitration proceedings against the Government of India demanding a rise in prices earlier. But the increase does not seem to satisfy Reliance and the other company involved, BP.
Recently the Supreme Court of India annulled some allocation of coal blocks to conglomerates to extract coal, made over a decade ago, accepting allegations that there was a lack of fairness and transparency. While the Judiciary’s attempt to clean up the system was admirable, it caused chaos in the business sector and the investor confidence on the certainty of doing business in India.
India’s banking system
India’s banking system has also endured a torrid time of late. The sector has been caught out by an economic slowdown and also beset by bad debts. Arundhati Bhattacharya, the head of India’s largest lender, the State Bank of India, has declared that a through regulatory shakeup is required to prevent a repeat performance as Asia’s third largest economy strains to recover.
Almost a year into her role as Chairperson, she has said: “This has been one of the toughest times in the history of Indian banking.” She declared that State-backed institutions have “been able to hold it together,” but only just.
Bhattacharya took over the giant public sector lender, which controls a fifth of India’s $ 1.5 trillion bank assets, around a year ago, as a wave of problem loans hit major industrial conglomerates, many of whose investment projects had been delayed by the country’s lethargic bureaucracy.
In a common refrain from country’s where crony capitalism rules the day, she has called for “a little more teeth” and firmer regulations to target indebted tycoon cronies of ruling politicians. She expressed the view that rates of bad and restructured assets will keep rising for “at least a couple of quarters more”. This is despite bad and restricted assets having already hit around 10% of loans.
Tougher rules for defaulters
India needs tougher rules for defaulters, as well as a “proper bankruptcy law to help get orderly resolution of bad assets”.
Only a few months ago, liquor baron and Kingfisher airline Tycoon Vijay Mallya was declared a ‘wilful defaulter’ by an Indian State-owned bank. The meaning of this is that the bank was of the opinion that he wilfully and deliberately opted not to repay loans despite having resources to do so. This is a unique, if welcome, case, as few other business tycoons behaving in a similar way have been targeted in the same way.
Bhattacharya’s plain and outspoken style is shaking up the normal compliant, crony capitalism environment, in India. She has also targeted and criticised the country’s slow moving legal system, saying “what we need is a faster resolution through the courts,” stopping debtors stalling debt recovery efforts by obtuse legal devices.
She says that Indian banks share part of the blame. Lenders need to stiffen their attitude to politically-influential large industrial conglomerates. She says such crony industrialists “go from one bank to another, playing off banks against one another”.
India’s Mr. Sahara
In a similar vein, the saga of the rise and fall of Subrata Roy, India’s Mr. Sahara, is another crony capitalist classic. The flamboyant tycoon Subrata Roy’s fall from the rarefied heights of India’s pantheon of billionaires to a prison cell in New Delhi’s Tihar jail is one-in-a-million legends.
The enigmatic founder of the Sahara India Pariwar Group built his empire based on his knack for taking deposits; ostensibly from tens and thousands of millions of poor Indians without access to formal banking services.
The investments and interests of this Lucknow-based group spanned real estate, media and the retail trade. It once ran an airline, which flew to Colombo too. The brand sponsored, until December 2013, the Indian Cricket Team; the brand and the logo on Sachin Tendulkar’s shirt, was familiar to any cricket fan.
Roy, who refers to himself as ‘Saharasri,’ literally Mr. Sahara, is a combination of shrewd businessman, flamboyant showman and cult leader. He required new employees of Sahara to greet each other with ‘Good Sahara’ instead of ‘Good Morning’!
New recruits were whisked to Sahara City – a whimsical blend of office space and recreational area, complete with a funhouse – for lengthy induction sessions including six-hour log speeches by Roy. He spoke on ‘collective materialism,’ ostensibly ‘the perfect blending of materialism and emotionalism’.
Those who had the misfortune to arrive late or doze off as Roy kept talking until well after midnight, were subjected to various forms of public humiliation, such as being forced to stand the rest of the time or write public apologies.
In 2010 the Sahara Group bought London’s Grosvenor House Hotel. Two years later it acquired the prestigious New York Plaza Hotel. Today Sahara and Subrata Roy, the Group’s self-styled ‘Managing Worker,’ are facing an uncertain future.
Contempt of court
Since March 2014, Roy, the man who one hobnobbed with Bollywood stars, sporting heroes and top politicians, has been in jail for contempt of court, after failing to appear at a Supreme Court hearing in connection with Sahara’s battle with securities regulators over a $ 4 billion convertible bond issue.
Sahara’s executives, speaking on behalf of the jailed Subrata Rory, insist that the business remains robust, unaffected by Roy’s detention. But the Sahara billboards, once ubiquitous in Lucknow, have disappeared, and a lawyer for the Group has admitted that the Group struggled to pay staff salaries, rent and electricity bills after some of its bank accounts were frozen last year. Tamal Banyopadhyay, author of ‘Sahara: The Untold Story,’ says: “They are under some financial pressure. Liquidity is an issue.”
India’s laws allow up to six months’ imprisonment for contempt of court, which Roy has already exceeded. But as the price for his freedom, the Supreme Court has ordered that he pays around $ 1.6 billion, half in cash and the other half in bank guarantees, to the Securities and Exchange Board of India (SEBI), to refund investors in the convertible bond.
In 2011 SEBI ordered Sahara to repay all investors to the convertible bond, together with an annual interest at 15%, after coming to conclusion that the Group had broken capital market rules by miscalling the bond issue a private placement in order to avoid regulatory scrutiny. Sahara claims it has already refunded 93% of the duped investors, and has struggled to come up with the cash ordered by the Supreme Court.
In July 2014, in an unprecedented step, the crony tycoon Roy was allocated a special room inside New Delhi’s Tihar jail, equipped with telephones and internet connections to give him an opportunity to dispose of Sahara’s trophy foreign hotels, London’s Grosvenor House and New York’s Plaza, to raise the funds ordered to be paid by the Supreme Court. But by the end of September, he was unable to put through any deals and was sent back to his normal cell.
India’s media has give wide coverage to the story doing the rounds that Sahara’s impressive asset portfolio may very well have been accumulated in part by a providing haven for the ill-gotten gains of corrupt Indian politicians.
The Indian electoral system, like many others in the region, needs vast amounts of cash to be spent at election time. Politicians need convenient places to park the funds, as when mobilised, to draw out and spend at election time.
Jayalalitha Jayaram
Witness the case of Tamil Nadu’s Chief Minister, the redoubtable Jayalalitha Jayaram. Jayalalitha is a three-time Chief Minister of Tamil Nadu.
She and three of her cronies, Sasikala Nadarasan, Ilavarasi and V.N. Sudhakaran, have been convicted, in September 2014, of corruption, having assets which could not be accounted for and misusing her office during the period 1991 to 1996. The trial went on for 18 years. It was transferred from Chennai to Bangalore to ensure fairness.
The assets which came under purview in the case included farm houses and bungalows in Chennai, a farm house in Hyderabad, a tea estate in the Nilgiri, valuable jewellery and investments in banks. A raid on her residence in Chennai yielded 800 kg of silver, 28 kg of gold, 750 pairs of shoes, 10,500 saris, 91 watches and other valuables.
She is the seventh politician in India, the first MLA from Tamil Nadu and the third on an all-India basis disqualified by the Supreme Court of India’s judgement in 2013 on the Representation of the People’s Act that prevents politicians convicted of corruption from holding office.
Violating every principle of good governance
In our South Asia, crony capitalism, is therefore not among the unknowns (and that is probably an epochal understatement!). In some countries there is a very special variety, which reeks of conflict of interest.
Owners with executive power over business conglomerates which have interests in businesses covering the whole English alphabet – A to Z, from Airline General Sales Agencies to Zucchini cultivation and processing, and everything in between – including casinos, export of Sri Lankan produce, financial services, freight forwarding, port operations, rubber gloves, shipping, stock market trading, tea plantations, tea and commodity marketing, tourism and leisure, etc., also hold office at the highest administrative level in ministries of Government as secretaries and chief accounting officers.
This violates every principle of good governance, including, Gautama the Buddha’s Dasa Raja Dharma, Hinduism’s Code of Manu, Islam’s Fiqh, the Christian 10 Commandments, the Establishment Code, the Administrative Regulations, the Financial Regulations and indeed every other known rule of civilised good and decent behaviour! This is the veritable great-grandmother of conflict of interest!
The natives, they do it in spades!
Indeed the words ‘conflict of interest’ will have to be redefined to catch up with the violations of principled public administration and the prudent management of public finances. That doyen of British colonial investments in the colony, way back in the days of the British Empire on which the sun never set, when the epitome of “Not done old chap, stiff upper lip and all that, we Brits do not indulge in such shenanigans, it’s just not cricket, eh what? We leave such things to the natives”. And the natives, they do it in spades!
Chas. P.…, who started the whole caboodle at ‘Dakunu Lake, Aga Nagaray, G….. Puray”, must really be rolling in his grave, in the coir dust, in shame! Such people also hold office in regulatory agencies which regulate industries and services, in which corporates in which the office holder has investments are big players!
Public officers are the ‘guardians’ of the public purse, who, by tradition, custom and law, should not have interests in the sectors they work in or regulate. When the proverbial cat is put in charge of the pigeon coop, the jackal in charge of the chickens, and the wolf in charge of the sheep – whither good governance?
No wonder a person purporting to hold high judicial office wondered aloud the other day whether good governance actually existed anywhere in the world! This is further compounded when one of his predecessors in office publicly seeks the forgiveness of the people for giving an erroneous judgement in a case involving an important personality and the misuse of donated resources. What are we coming to? Where are we headed?
Time to take a stand and object
It is really time for good upstanding people interested in maintaining standards and public probity to take a stand and object to this sort of behaviour. The Judiciary in India, to their everlasting credit, have taken a stand in the Subrata Roy ‘Sahara’ and the Chief Minister Jayalalitha cases.
But where is this sort judicial activism taking place in the rest of the region? All we have is a former Chief Justice confessing in public and begging forgiveness for admittedly giving false judgements! Pathetic!
All the while taxpayers’ money, and money borrowed at exorbitant rates from foreign sources, is being splashed on prestigious white elephant projects, not to mention the alleged siphoning off. These loans have to be paid back by the taxpayers of future generations.
Chinese submarines come and dock in Colombo’s new harbour, berths in Hambantota Port are allocated to Chinese ships, and SinoShip News says that Chinese State-owned companies will operate four berths.
Were all these disclosed at the time, when those infamous nonexistent rocks were being blasted? These are the questions which have to be answered. But will they ever be? When crony capitalists are holding critical positions in the administration and making money while suppressing any objectivity in decision making?
Are we are waiting for an Arab Spring or a Hong Kong type uprising? Has not this ‘Wonder of Asia’ been through such experiences before, sufficient for a century? Did not certain worthies complain to the human rights bodies in Geneva at that time, setting the pattern for today’s crises? Do we not learn the lessons? History repeats itself for those who do not bother to learn from the lessons of the past.
(The writer is a lawyer, who has over 30 years of experience as a CEO in both State and private sectors. He retired from the office of Secretary, Ministry of Finance and currently is the Managing Director of the Sri Lanka Business Development Centre.)
