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Creating more shareholders and a dynamic private sector economy

Comments / {{hitsCtrl.values.hits}} Views / Thursday, 17 December 2015 00:00

Untitled-2Premier says “I want to see an expansion in shareholding. According to the newspapers, that was what he said at the SEC. Wide shareholding is important to sustain an inclusive private sector driven economy. The private sector model is complex. It is like a symphony where the different instruments must blend together. The big firms, the small firms, the SME sector, agriculture, fisheries, services and the state must all interact in harmony. As the country will depend on it to generate GDP, growth, exports and employment, the Government has to facilitate this inclusive private sector.


One important part

In this article, I will focus on one important piece in the model – the big private sector firms. The socialists around the world, who oppose the concept of a free enterprise private sector model, argue that the private sector looks after itself and keeps the profits to themselves, and the people do not get a share of this prosperity. Is our private sector different?


Everybody wants to save

Saving is an emotional issue. Every individual wants to save, and wants to see the value of their savings growing. They can achieve this by sharing in the profits earned by the private sector firms. In the heartlands of capitalism this happens. According to what I could glean from the net, in the Vatican of capitalism – the USA – 50% of the population has an investment in shares (probably both direct and indirect). When you add the family, it means that almost everybody has a link to shares. In the UK, 45% of the population is linked to pension funds that invest in shares. In Malaysia, 39% of the population has shares.


Sri Lankan scenario

Pension funds, provident funds and individuals all need to see their savings grow in value. Investing solely in fixed interest Government Securities, means a low rate of interest and no capital growth. A Rs. 100 Government Bond will always be a Rs. 100 Bond. There will be no capital growth (its price will change marginally according to market interest rates). The only way that funds that provide for retirement, like pension and provident funds, and individuals, can get a growth in value is by investing in shares. Shares will provide an annual dividend and the value of the share will increase in line with the growth in profits of that company.

Therefore, to create a dynamic free enterprise economy in Sri Lanka which benefits both firms and society, shares must be available to individuals, pension funds, and provident funds.


How do we perform?

a) Very private firms

I define as “very private firms”, those firms whose shares are not available to the public. The entirety of the earnings is pocketed by the owners. Invariably, this will be members of a family. They may reach great heights of financial success but the public at large will not get even a tiny slice of the profit cake.

There are some big well-known firms in the very private sector. Maliban, Ceylon Biscuits (Munchee) Brandix, MAS, Hirdramani etc.

Their growth in earnings and cash has been helped by tax holidays and the low taxation of corporate profits .They have generated employment and some have developed good exports. In a society where there is freedom, everyone is entitled to decide whether they will keep all the earnings or share a part with the rest of the country. So, they are entitled to do what they have decided to do. They have not committed a crime. But, they do not help to create confidence, that a private sector model will create prosperity for all.

b) Private sector firms

Private sector firms are those that are public quoted companies, whose shares are available to the public. However, a high percentage of such firms are very closely held. Only a smaller part of the whole is available to the public; the rest is closely held by family and associates.

There are many well-known firms in this group, like Aitken Spence, Distilleries, Carsons, Hayleys, Tokyo Cement, Access etc.

Both these categories of firms do not help to refute the socialists’ argument that the private sector only looks after itself.

C) Free enterprise firms

The third category is what I call free enterprise firms, because a very large part of the equity is available to the public. The gold standard in this category is John Keells. It is the perfect model. All the shares are available to the public and a small clique of shareholders does not control the management. John Keells is a self-perpetuating oligarchy. The oligarchs create their successors and pass the baton. The reigning oligarchs will have some holding of shares, but even as a group they have not had a dominating controlling share holding. So the baton has been passed smoothly from team to team. From Bostock, to Blackler, to Balendran, to Lintotawela, and now, to Susantha Ratnayake.

If Sri Lanka is to become a dynamic private sector economy that contradicts the chant of the socialists, we need lots more firms like John Keells.

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