Couple of days back, I heard British Prime Minister Gordon Brown in Labor party meet – in what was dubbed as the make or break speech of the beleaguered leader.

We all do exceedingly well in our columns and speeches – but when it comes to practicing those, history proves we have achieved catastrophic failures. A look at the global financial crisis and bailing out of private enterprises with tax-payers money as happening now in the bastion of free markets and capitalism – in the US proves that beyond any doubt.

Brown was no exception. He stressed on two well-known facts. Government can’t give everything; neither Government should allow an unbridled market as a panacea to the first.

A lot of debate is currently undergoing in the US Government on how the proposed bailout of Paulson and Bernanke should work for the best interest of Government – meaning the main street (its citizens and tax-payers) and also for the Wall Street.

A broader question therefore is – can capitalism and socialism co-exist? Many influential people in the US, champions of free markets, may hate to admit such a possibility. And so would various other columnists and economists who have historically argued for the markets, starting with the ‘invisible hand’ of Adam Smith.

The question is indeed a complex one, and therefore it’s unlikely that an easy, practical and more importantly implementable (with checks and balances for both Government and markets – effective regulations) solution can be found off-the-shelf without much trial-and-error approach. And what would suit the Western developed economies may not suit the billion-plus populated economies like China and India, where a vast majority needs Government to support them, directly or indirectly.

The history so far shows that as nations moved to advanced economies, Government effectively got out of business and concentrated on Governance. At the same time, Government decided how those businesses should be run, with effective policies. As expected, business interests started dictating many of those regulations as stakes involved were high.

At the same time, there were challenges for developing nations to get out of business. The process can’t be done in a day or a year; it’s a slow transition process. And during the process, many times investors in Government-run businesses lost huge money, and many times patience ran out as reforms came to a standstill. Government as a group that ran businesses failed to keep its promise while running that business, and protect basic minimum shareholders’ interests.

So state controlled firms were divested, starting with minimum stakes like 10-25% or so, and keeping majority control with Government. State run banks, again with majority control with Government were asked to lend money where the Government wanted it to, for political or populist reasons, leaving aside the commercial reasons. There were shareholders in those firms, but the role of the shareholders mostly was to complement the government in its right or wrong measures by providing blank cheques in the form of the resources of that firm.

Cases in point are Chinese power producers, or Oil marketing companies in both China and India. Similarly state owned banks of both these nations also perfectly fit in here. As inflation ran high, government decided to put the priorities of the nation higher (apparently, however does it solve the problem!) than the interests of the shareholders of these firms. 

During normal times, most state-owned firms failed to generate returns as privately owned firms. Whether market was right in awarding the share-holders of privately owned firms can always be debatable. One of the classic examples of it was the market-cap of Reliance Petroleum Ltd. (RPL) when it crossed the combined market-cap of all the three state-owned OMCs (Oil Marketing Companies) in India. The state owned OMCs collectively had multiple times of refining capacities and an unparalleled distribution arms, whereas RPL were yet to have its plant commissioned. However Government decided that the asset of these OMCs be used for loss-making purposes for the firm to control inflation.

With my limited understanding, no one can probably beat the example of MTNL, a state-owned listed telecom player in India as the best example on how minority shareholders were taken for a ride by Government, for no benefit for tax-payer, citizen, society or even shareholders.

Companies can go bust, and so can Government owned firms. However how Government effectively allowed a company to be the toast of short-sellers is the example of MTNL.

The company is in telecom space, in a market like India. It’s been profit-making, and Government even took the firm as a show-case and listed it in the NYSE few years back. Investors have lost more than 70% of their IPO value since then, when private players generated 1000% return or more. And then there were cases like Bharti or Vodafone in India, which rewarded share-holders (public or private) as any gold-rush could.

It’s said that MTNL has cash-balance equivalent to its market-cap. It’s also said that it has huge real-estate in Mumbai and Delhi, two prime cities in India. But it also has a management that’s least share-holder friendly, and an archaic Government rule that prohibits it from providing telecom services beyond Delhi and Mumbai. The rule is against Indian citizens when one considers the poor tele-density in rural India, and as MTNL looks forward to investing its surplus cash elsewhere (outside the country) when there is a gold rush in India itself for other players.

The rule was formed when MTNL had monopoly of services in Mumbai and Delhi, now there are many private operators, who also operate nationally. Tele-density in these two cities have long saturated, and MTNL – primary a land-line service provider, faced unprecedented challenges from lean private operators.

Most surprisingly, Government didn’t achieve anything for its citizens by penalizing MTNL (its shareholders as employees or management didn’t care for its growth either!). Rather Government also lost (and so did the citizens) as the majority-owner of the firm as its share has been on the decline since ages due to policy-uncertainties. The question therefore comes – why has the Indian Government been slowly killing a gem of an Indian company, which, in my opinion is the best example on how a firm can follow lose-lose-lose-lose policies for all its possible stakeholders?

One can blame Government policies as ‘sleeping for years’ (BSNL divestment discussion for years and then a possible merger), one can think of lobby-pressure from private telecom players. Whatever the reason can be, it’s no way tenable for the share holders of MTNL. It’s surprising that shareholders of MTNL have refrained from taking its promoters to court for cheating them by selling a good idea that the Government itself eventually and deliberately made bad, for no apparent gain to any. The way Indian judiciary work may be the reason that refrained the shareholders of this firm.

To make the analogy complete, as the bail-out of Fannie, Freddie or AIG saw shareholders getting wiped out as well as tax-payers funding the rescue efforts; in case of MTNL – if it is allowed to file one such bankruptcy, the shareholders can rest assured that they would get richer by multiple times, the taxpayers would also benefit (Govt. will be richer by billions) and so would the citizens of India – directly or indirectly.

As the US debate on the optimum balance of tax-payers bail-out to market; emerging nations need to debate on shareholders of state-owned firms bailing out the Government, for a good, bad or for no apparent cause as well.

Just as the West wakes up and understand that freewheeling capitalism can’t work, so was the learning from many of the socialist states who didn’t adapt to market economy. However the learning from many of these mixed economies also doesn’t point out a great story where the common minimum interests of the shareholders, the taxpayers and the citizens can be protected in a fair manner.

  

The author has positions in MTNL.

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