Expropriation Bill: Govt. intentions not bona-fide

Some may say it’s unfair to term the Bill to take over underperforming enterprises and underutilised assets as Expropriation. The schedule to the Bill includes 37 companies of which some are non operational and others are ‘going concern’. Amongst the going concerns are highly profitable and efficient companies of which most are private, while some are quoted companies.

As the Government intends to takeover profitable going concerns through the Bill it would clearly be an Expropriation, which is even worse than a Business Acquisition. The last attempt at the Acquisition of business and lands was the ‘Business Undertaking (Acquisition) Act No. 35 of 1971. For example, Pelwatte Sugar Industries Limited, which has a net profit of Rs. 857 million at the end of the second quarter 2011, is listed under schedule II as an underutilised asset and its land is to be acquired.

The Bill does not clarify what consequences will follow the takeover of land rather than the enterprise for the workers and shareholders. Here is a case where land expropriation is more destructive than an acquisition of the enterprise. Just like the Employment Pension Benefits Fund Bill, the present Bill does not appear to have originated from the Legal Draftsman’s office and there is much to be desired in its drafting.

Urgent Bill

The public will be horrified to know that even at the time of writing of this article on Tuesday 8 November, Parliamentarians who are supposed to debate the Bill and vote on it by Wednesday 9 November have still not seen a copy of the Bill in any of the two National languages.

The Constitutional provision for the presentation of urgent Bills should be invoked only where an urgent situation has arisen. If the Government requires to declare war with another State or contain the threat to internal law and order or cope with a natural calamity such as a tsunami, there may be grounds for urgent legislation.

When a Government seeks to introduce urgent Bills for economic activity, naturally there is a concern that there is a hidden agenda. It is of particular concern that the Government may takeover assets from the present owners and reassign it to friends and relatives.

Article 124 of the Constitution restricts the judicial review of legislation. In the light of Article 124, urgent legislation must not be considered unless in the category of an impending natural calamity.

An urgent Bill denies citizens of the right to invoke Article 121 of the Constitution by petitioning the Supreme Court, within one week of the Bill being placed on the order paper, and the Supreme Court communicating its determination to the President and Speaker within three weeks of the petition being filed. Therefore the person aggrieved by this Act has no possible recourse to the judicial system.

It must be pointed out that the present Government abolished the 17th Amendment and introduced the 18th Amendment as an urgent Bill. The Independent Constitutional Council, the Election Commission, the Police Commission, the Public Service Commission, the Anti Bribery Commission and others were abolished and the two term limit on the Executive President was also removed simultaneously. A major change to the nature of the Sri Lankan State was undertaken as urgent legislation.

Since those Constitutional amendments were pushed through with little discussion in civil society and Parliament, the Government has acted boldly in presenting more urgent Bills. The Supreme Court determines the consistency of a proposed Bill with the Constitution, and not on its broader context. As we all know the Court may be supreme but is not infallible. The Government may satisfy legal requirements but is acting against all democratic norms in such legislative manoeuvres.

Once the Expropriation Bill has been passed it is possible to amend the schedule to include other enterprises. Such amendments will require a simple majority in Parliament. Private enterprise is at great risk as the justification given for such expropriation could be as flimsy as the provision of Government incentives as tax concessions. Minister Keheliya Rambukwella is quoted in the Lankadeepa of 4 November 2011 as stating that more enterprises may be brought under the ambit of this Act in the future.

Defining Underperforming and Under Utilised Assets

According to the draft bill an ‘Underperforming Enterprise’ is referred to as any Company or Authority in which the government has shares, has paid contingent liabilities of the enterprise and is involved in protracted litigation with regard to the enterprise which is prejudicial to the national economy and public interest.

‘Underutilised Assets’ refers to persons who have been transferred the free hold or lease hold of state lands or have been granted taxes and incentives under the BOI or Government laws for the purpose of generating employment, foreign exchange earnings or saving or economic activities, beneficial to the public, and such benefits have not been accrued or prejudicial to national economy and public interest.

The above definitions are vague and have no measurable benchmark. This can lead to arbitrary applications. A comprehensive Bill would have provided for measures of profitability, employment, foreign exchange and so on. The Bill does not stipulate any time periods in which these definitions should be applied.

Protection of investment

Article 157 of the Constitution provides for investment treaties that are passed by not less than two third of the whole number of members of Parliament to supersede any law that can be legislated even in the future.

The Board of Investment (BOI) website proudly states ‘Today, Sri Lanka is ranked as the most liberalised economy in South Asia. Investors are provided with preferential tax rates, constitutional guarantees on investment agreements, exemption from exchange control and 100% repatriation of profits.’

Are these Constitutional guarantees and BOI undertakings only for the foreign investors while local investors are subject to expropriation at the will of a Government? Foreign investors receive preferential tax rates, exemption from exchange control, and land leased or land sold as freehold. Why then are local investments more vulnerable to the writ of Government? There are BOI approved companies which are non-operational and in some cases where the investors have abandoned projects. While there is a case for the State to takeover such assets, that must be resolved in the light of the agreements signed between the parties. Unfortunately those non-operational companies and profitable going concerns have been included in the same Bill, bringing into question the intention of the Government.

The Foreign Direct Investment (FDI) into Sri Lanka in 2009 and 2010 was US$ 600 and 500 million respectively. The net portfolio outflow was US$ 250 and US$ 175 million in 2009 and 2010. The FDI for 2011 can be calculated only after deducting proceeds for the sale of Galle Face and other land. To maintain 8% GDP growth over the long term the present investment levels are woefully inadequate.

As the visiting Vice President of the World Bank said last Friday, “To mobilise large sums of money, they want to be certain that their money will be safe, that they will be making profits out of it and, they can eventually sell. I think that’s the issue with the expropriation bill that, if the rules of the game change especially for foreign direct investment, it does raise questions some people will pose… Sri Lanka has huge potential which investors can see. The question is what are the rules that they’ll be playing with and are these rules going to change.”

The Expropriation Bill is not only creating uncertainty but is tainted with the allegation that it victimises those it chooses.

Victimisation

Sevenagala Sugar Industries was purchased by the Daya Group of Companies in 2002 for Rs. 550 million. The other bidders included Distilleries Corporation of Sri Lanka Ltd., with a bid of Rs. 450 million and Pelawatte Sugar with a lower bid. 90% of the shares were sold while 10% was offered to the workers. The sale process was handled by Public Enterprise Reform Commission (PERC), whose Chairman was Dr. P.B. Jayasundera, the present Secretary to the Ministry of Finance.

In 2002 the company had a turnover of Rs. 350 million and made a loss of Rs. 149 million. Today the turnover of the company is over Rs. 1,100 million and the profitability exceeds Rs. 200 million. 469 hectares of land had been provided on a lease which was signed by the President in April 2011 after years of delay.

Paragraph 10 (3) of the agreement 278 entered into by and between the BOI and Sevenagala Sugar Industries Ltd. clearly states that ‘the business and capital or assets employed or used in the business on improvements and returns belonging to the enterprise shall not be liable to acquisition, expropriation…’ The value of such Government agreements is being called into question by the introduction of the Expropriation Bill. 53.5% of Pelwatte Sugar Company was sold to Master Divers for Rs.300 million in 2002. In March 2011 Melstacorp a subsidiary of the Distilleries Company of Sri Lanka acquired 47% of Pelwatte Sugar Company for Rs. 884 million. The company is a stock market quoted company with many shareholders.

The Bill attempting to take over the land that has been long-leased to the company will cripple operations and destroy shareholder value. The unaudited financials estimate a net profit of Rs. 857 million at the end of the second quarter 2011. It is inconceivable why a Government will attempt to takeover assets of a company which has made a turnaround and poised to grow strongly.

There have been accusations that these companies have been producing molasses and ethanol to the detriment of its sugar production. It is public knowledge that in addition to the extraction of sugar there are many by products when processing sugar cane.

While not pursuing these arguments, it is relevant to point out that if these companies were in breach of its agreements then corrective actions should have followed rather than the attempt to expropriate. It is evident that the intensions of the Government are not bona-fide particularly with reference to Sevenagala, Pelwatte, Ceylon Tractors and Ceylon Leisure. It is heartening to note that the opposition to the Bill led by the United National Party, religious leaders and the media is attracting public attention. The regional chambers have also strongly opposed the Expropriation Bill, while it is to be sadly noted that the chambers in Colombo have not provided the leadership necessary to protect the interest of private enterprise and investment.

(The writer is an UNP MP.)