Other people’s business

There is a story about Sir Winston Churchill. When an Opposition Member of Parliament, he was using the urinal in the House of Commons gentleman’s restroom, when a Minister in the Labour Party Government (which was in the midst of a spate of nationalisation of British industry) walked in and stood at the adjoining urinal.

Sir Winston, purposefully and hurriedly, stopped using the urinal, buttoned up and walked away, very quickly. The Labour Minister, in the spirit of traditional civilised camaraderie of the Westminster Parliament, called out, in an amused tone, ‘Winston, why the hurry?’ Sir Winston replied, ‘I am afraid, for when you people see something performing efficiently and utilised well, you acquire it in the public interest!’

Revolutionary linguistics

I was reminded of this when the Government announced that an urgent bill labelled as ‘The Revival of Underperforming Enterprises and Underutilised Assets Bill’ (it was reported, later, the name would be changed) had been approved by the cabinet to be sent as an urgent bill for the opinion of the Supreme Court on its constitutionality.

Revival seems to be the motivating factor, but after expropriation. In the last Budget, there was a reference to ‘non performing’ enterprises, but for that to migrate to ‘underutilised’ and ‘underperforming’ requires revolutionary linguistics, to put it mildly.

An era of ceilings

My mind went back to 1 October 1971, the date on which the Business Undertakings (Acquisition) Act No. 35 of 1971 came into force. At that time we were living in an era of ceilings. Ceilings on housing, ceilings on land, ceilings on income, ceilings on the amount of foreign exchange a traveller could take abroad and ceilings on all manner of things, which one could never imagine could have had ceilings in the first place!

The ceiling on land decimated agricultural and livestock productivity in a comprehensive manner to an extent it has still not recovered even today, three plus decades later. The ceiling on housing effectively stopped entrepreneurs building houses to rent out and the national housing stock actually diminished for decades thereafter, providing the political space for Prime Minister Premadasa to launch a massive house building campaign.

The ceiling on income left no choice for the entrepreneurial and creative businessman but to emigrate or to get into businesses outside the pale of the law, on which, since it was below the radar, no bureaucrat or politician could impose a ceiling. The result was a huge underground black market economy, which promoted criminality and lawlessness and persists to this day.

The story as to how the BPO and Information and Communication Technology industry developed during the time of the Permit Raj in India (before the time of Rajiv Gandhi and Sam Pitroda), notwithstanding all the permits and controls imposed on all other sectors, is interesting, it was because there was no politician, babu or bureaucrat who understood or had an idea nor a clue on what the dynamics of this new emerging sector were, so they could not control, stymie and hamper its development, as they did to other sectors!

The Business Acquisition Act

The Business Acquisition Act was the proverbial sword of Damocles, hanging over the head of any successful entrepreneur, who therefore did not let his success show in the white economy, pay taxes on his true income, but was forced to put his creativity to use, in the black economy, outside the regulatory environment.

This obviously led to corruption of the political class, regulators, the revenue officials and the licensing officials. The act was an effective blanket ceiling on enterprise and entrepreneurship.

The Business Acquisition Act authorised the minister of finance on his own or at the request of any other minister, to direct the secretary to the Treasury to acquire on behalf of the government any business undertaking. The government would have had absolute title free of any encumbrances of such a business undertaking.

The minister also had the power to repudiate any liability under any contract or agreement entered into the acquired entity. A competent authority was to be appointed to administer the affairs of the acquired entity.

The proprietor of any business acquired had a right of appeal to the minister on the acquisition. The minister could refer the appeal to an Advisory Board created by the act. Moveable and immoveable property of an entity vested was requisitioned by an order published in the gazette. The minister could authorise a person to enter the acquired premises at any hour.

A ‘business undertaking’ is defined in the act as ‘any undertaking of a commercial, industrial, agricultural or professional nature, including all moveable and immoveable property, all rights and interests etc and all books and accounts,’ etc. This law was on the statute book for a number of years until repealed and was used by governments to take over a number of enterprises.

Most of these were run into the ground by stunningly incompetent ‘competent authorities’ until, finally, most of them were sold off, as the burden on the tax payer to keep them afloat was too great and affected the budget deficit negatively. This legislation killed the entrepreneurial spirit in Sri Lanka for generations and encouraged people to leave the legitimate open economy and get into the illegitimate, underground, black economy.

Today’s Act

Today’s Act for the Revival of Underperforming Enterprises and Underutilised Assets, does not confer a blanket power of takeover of enterprises. It is limited to those which are deemed to be either an underutilised asset or an underperforming enterprise; both sets of words are extensively defined in the interpretation section of the act.

The present effect of the act is limited to specific industries referred to in the two schedules to the act. It is said that a solemn undertaking given before the highest in the land to the business community that the number of Underutilised Assets in schedule II would remain at the magic number of 36, has already, before even the ink on the minutes of the meeting had dried, been violated by Kanatale Sugar being added at the committee stage in Parliament. The attraction seems to be molasses ethanol. It seems that only Hingurana (closed down) produces sugar!

Schedule I one has only the company owning the Hilton Hotel in Colombo. While schedule two, has 36 other entities, (today 37, it is reported, subject to confirmation,) ranging from public listed companies, lands belonging to the Government, land belonging to Raja Maha Viharas, land belonging to former State corporations, Vanaspathi producers, viable enterprises producing primary products, bankrupt and closed down BOI projects and an exhibition centre which is owned by a foreign investor.

It is reported that even a temple land belonging to the historic and revered Muthiyangana Raja Maha Vihara, Badulla, leased to the Colombo Commercial Company, has been listed. Temple lands were exempt from even the infamous land ceiling of yore.

Critics see the anti ‘bhumiputhra’ bias, seen in the colonial Waste Lands Ordinance, post independence nationalisation of bus transport and insurance of the late 1950s, the land ceiling of the early 1970s, in that local owner’s lands first being expropriated, is reflected in this bill.

Supreme Court stance

The Cabinet, by deciding that bill is an urgent bill in terms of the Constitution, has obtained a determination of its constitutionality prior to any member of the public or the affected owners seeing a copy of the bill.

Some argue that it would be still possible for an owner or any stakeholder of a scheduled entity to litigate on the issue whether his enterprise is an ‘underperforming’ or ‘underutilised’ one as defined in the act. Some petitions are in fact before the courts.

The view of the Supreme Court is on the constitutionality, as to whether the act violates any of the citizens protections provided for in the constitution and if so whether a two-thirds majority is required, to overcome this violation and for the act to be an amendment to the Constitution.

The wording of the bill is below putrid, it is very carelessly drafted, the Supreme Court has also expressed the view that the drafting must be tightened up. The Court, it is reported, was told that the draft was prepared by private lawyers and not the Legal Draftsman. That shows the amount of respect the State has for its servants, paid for by the tax payer! I am assuming the private lawyer would have done this shoddy job pro bono!

The issue of whether a scheduled enterprise comes within the definition of an underperforming one or an underutilised one may not be finally and conclusively decided by the mere fact that the enterprise is included in the schedule.

If it can be manifestly established on evidence that in fact the enterprise, although included in the schedule, is neither underperforming nor underutilised, the validity of the takeover may be challenged.

The act provides for the appointment of a competent authority, whose task would be to revive the entity. The act also provides for a Compensation Tribunal, which determines the amount of compensation on claims made to it, from whose decision an appeal lies on a question of to the Court of Appeal.

One-off?

Much has been said and written on the present act being ‘one-off’ legislation and that it will not be repeated. But analysts point out that adding an additional schedule to the act through amending legislation is not a daunting task, and is something within the realm of the possible, with a simple majority in Parliament.

Who would have thought that the original Business Acquisition Act once repealed, that it’s the basic concept of acquiring other people’s business, would ever be resurrected, albeit in an allegedly limited way?

Urgency under fire

The Bar Association has come out against the use of the ‘urgent bill’ procedure, saying that there is no justification for this bill to be so classified, other than to get the judiciary’s views without the general public having the right to canvass the constitutionality.

This provision of the Constitution has been abused from the time it was enacted. We don’t have a tradition; unfortunately, of publishing of white papers and conducting an open and transparent, public, dialogue before major policy initiatives are taken.

A matter of fact

Taking the definition of an ‘underutilised asset’ in the law, the logic for the vesting seems to be that State land has been transferred to the entity within the last two decades. Or land owned by any person to whom within the last two decades tax concessions had been granted, or Government guarantees been given, on the basis that employment will be generated, foreign exchange will be earned, or economic activity will be generated. But those benefits have not accrued and prejudice caused to the national economy by such failure.

These are all questions of fact, which must be decided objectively, by an unbiased and competent person going into the operational details of the enterprise, recording evidence from stakeholders and examining documents in terms of the Evidence Ordinance, and coming to a considered determination that the entity has in its possession an asset which is underutilised.

The bill baldly states that entities having ‘underutilised assets’ are found in schedule II. A list of 36 entities follows (now 37?). The issue whether they all come within the definition of those having underutilised assets as defined in the bill, is one of fact.

This must be proved on evidence under oath, before a competent judge and such evidence tested by cross examination. Any stakeholder affected by the vesting must have the right to be heard and to challenge such a finding of fact.

The bill does not state who made this determination? On what criteria? Submitted by whom? This in effect is a legislative judgment; the legislature decides these things by enacting the law!

The owners of these enterprises and other stakeholders are bound to have matters within their knowledge to establish that the entity is not by any objective criteria and underutilised asset. But they have no voice. The business is simply vested in the State by a law being enacted.

Who is his right mind will, even in this thrice blessed isle of ours, think of starting an enterprise on any land which the State once owned? Or take the benefit of any tax concessions for an enterprise on his own land?

Hotel Developers

An ‘underperforming enterprise’ is defined as an entity established in terms of a law, in which the State owns shares and where the State has paid contingent liabilities, and the State is entangled in protracted litigation, which is prejudicial to the national interest.

The first schedule, which refers to ‘underperforming enterprises,’ contains only one company – Hotel Developers – which holds the land on which the Hilton Hotel, in Colombo, is located.

No one by any stretch of imagination can say that that the Hilton, the top end brand in the leisure industry, is underperforming at present, especially when all and sundry (barring a few sceptics) are claiming that we are in the midst of a tourism boom and projecting astronomical figures as regards arrivals in the near future.

Granted, there is a legal dispute going on, which has existed for ever and a day. But certainly the Hilton Hotel cannot be said to underperforming by any standard. Should not any stakeholder adversely affected by this acquisition have the right to question by what measure or on what evidence, whoever determined that the enterprise was underperforming, should be required to state his reasons, under oath, before a competent court and his evidence tested by cross examination, to establish , that at least on a balance of probabilities that the enterprise was in fact was underperforming, that the State has in fact paid contingent liabilities, that there is protracted litigation, which causes prejudice to the national interest?

These are all questions of fact, which have to be established by oral evidence, under oath, tested by cross examination, or properly proved documents in terms of the Evidence Ordinance before a competent court.

In the 1962 coup case, the Privy Council declared that the legislation under which the suspects were convicted was bad in law, because it was ‘ad hominem’ (targeting specific named individuals in a schedule to the act) and ‘ex post facto’ (legislated after the event – a legislative judgment) and therefore a violation of fundamental human rights.

But this was in the glorious days before human and fundamental rights were protected by Constitutional provisions, as of now, before a government could go to the judiciary, prior to any member of the public even getting to know the content of proposed legislation and get an opinion on its constitutionality, in effect pre empting any legal challenge and before local politicians appointed the highest judges in the land.

High-handed action

The business community has correctly pointed out that a country which is expecting an annual foreign investment totalling $15 billion to keep to its highly ambitious (some say highly unrealistic) growth targets, should be doing many other alternative things, rather than legislating, by a virtual (albeit Constitutional – by taking the urgent bill route) sleight of hand, on expropriating other people’s businesses in this high-handed and arrogant manner, especially when there is legislation already on the statute book, which would enable the state to adequately take steps regarding the assets and enterprises which have been currently listed in schedule one and two of the bill.

Sevenagala

At Sevenagala, one of the functioning sugar producing enterprises, it is reported that members of the public have already taken the law into their own hands and ‘gheraoed’ the factory.

The ‘Wonder of Asia’ is certainly sending signals to investors the world over; the problem is what the signal is. We will know soon. It may well be the one which Sir Winston Churchill was worried about giving to his Labour Party Ministerial colleague at the restrooms of the House of Commons, Palace of Westminster. Do not be successful; if you dare to be successful, do not dare to flaunt your success, if not, the State will find a way to gobble you up.

An AFP report in the Business Times of Singapore says it all, headlined, ‘Sri Lanka faces foreign capital blow – Its nationalisation bill provokes comparisons to Robert Mugabe’s seizure of white-owned land in Zimbabwe’.

(The writer is a lawyer, who has over 30 years experience as a CEO in both government 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.)