The economics of nationalisation
Christopher Coye, aside from being a lawyer, is a bona fide, certified, degreed economist.
February 09 2012
The proposed Ninth Constitutional Amendment, whether it is legally or constitutionally valid or not, must be looked at in the context of Belize's socio-economic realities. The Ninth Amendment seeks to accomplish one primary objective: to entrench nationalisation of certain utilities - in particular, Telemedia and Belize Electricity Limited (BEL). Concerned that such entrenchment may be the subject of a successful legal challenge under the basic structure doctrine applied by the Supreme Court in Barry Bowen v Attorney General,(1) the legislature has sought to place the entrenchment beyond all legal challenge in the courts. By doing so in such a broad and expansive manner, the amendment subverts constitutional supremacy and the separation of powers doctrine, and purports to assert parliamentary supremacy at the risk of undermining the protection of fundamental rights and freedoms.
But what of its primary objective - the entrenchment of the nationalisation of utilities? While nationalisation may be desirable from a protectionist approach, is this for the common good? Will nationalisation of utilities produce wealth for the nation of Belize? At its economic core, will it result in a more efficient allocation of scarce resources? In other words, how does it benefit the Belizean people?
Nationalisation is nothing more than the transfer of assets from private hands to government hands in exchange for an equivalent liability. If the transfer of assets results in private hands receiving anything less than fair-value compensation from the government, the government will have engaged (at a minimum) in unjust enrichment, if not expropriation. It is assumed that the government does not wish to enrich itself unjustly or otherwise expropriate property at the cost and loss of the former private owners, which would violate fundamental property rights and destroy investor confidence to the detriment of the public interest.
If it can be assumed that there will be no unjust enrichment or expropriation, the acquisition in its own right - as a mere transfer of assets in exchange for an equivalent liability, from an accounting standpoint - does not yield any immediate net gain on the balance sheet of either the former private owners or the government. In other words, nationalisation in and of itself does not create wealth for the government, because the government must pay fair value for the assets that it has acquired. This fair value already accounts for future expected profits at the time of acquisition.
This raises the question: does the government have the money to pay fair value for the assets it acquires by nationalisation? If not, it must borrow the money or sell state assets. All indications are that the government does not have the money in hand to pay. What is more, whereas the government had previously sought to sell a portion of its equity interest to raise the funds, the Ninth Amendment proposes to establish the government's retention of no less than 51% of the issued and outstanding paid-up capital of the utilities. The government must therefore find from its own coffers (or those of the Social Security Board, as implied in the Ninth Amendment) the funds to pay fair value for at least that 51% equity capital.
In light thereof, what is the cost of borrowing this money? According to the electricity and telecommunications nationalisation laws, the applicable interest rate accruing on moneys owed by the government for reasonable compensation on nationalisation shall be the interest rate on fixed deposits at commercial banks in Belize at the time of acquisition. Utilising statistics published by the Central Bank of Belize at the time of Telemedia's nationalisation on August 25 2009, the average fixed deposit rate was in the vicinity of 8.5% per year. At the time of BEL's nationalisation in June 2011, the average fixed deposit rate was in the vicinity of 6.5% per year.
In the case of Telemedia, using the government's rough valuation of $5 per share as an approximate value at the time of acquisition, almost $240 million in value was nationalised. As two years have since passed, the accrued interest alone thereon at the 8.5% rate is in excess of $40 million, and interest continues to accrue at a little less than $2 million per month, or $65,000 per day.
A lot less information about the government's valuation of BEL has been forthcoming. In light thereof, having regard to BEL's book valuation of its paid-up share capital at the end of December 2010 as approximately $285 million, and considering that the former private owners held approximately 70% of the total paid-up capital, the government acquired approximately $200 million in value. At 6.5% per year, interest would accrue on this value at the rate of a little over $1 million per month, or $35,000 per day.
The nationalisation of Telemedia and BEL is thus costing the government - and ultimately, the people of Belize - a minimum of approximately $3 million per month, or $100,000 per day, in addition to roughly $480 million ($440 million principal plus $40 million interest accrued) now owed to the former private owners. In other words, nationalisation of these two utilities has increased the government's national debt by almost 50%, or half of the notorious Belize Government Superbond, with interest costs equal to or more expensive than the Superbond.
Does borrowing all this money and paying all this interest constitute a more efficient allocation of scarce resources? Does nationalisation bring a net benefit to the government and people of Belize? For the answer to be affirmative, the value gain of the shift in power and control from private hands to the government must be more than $3 million per month, or more than $35 million per year. This is not the gross dividends that the government gets from these utilities annually, but rather the increase in profits - and ultimately dividends - caused by the shift in power and control over and above the future expected profits of the former private owners at the time of acquisition.
In the case of Telemedia alone, the prospectus issued by the government is telling. It indicates that net income rose $1 million in the year after nationalisation, and projects that income will increase by an additional $17 million in the second year - largely as a result of the 5.5% reduction in the business tax rate charged on telecommunication services. Showing an increase in profit as a result of a reduction in taxes when the government is the owner of the company means little. If Telemedia were still a private company, there would be a net gain to the private shareholder at the direct cost of the government through its loss in tax revenues, but there is no net gain whatsoever under government ownership.
The expectation from the government's own financial projections as shown in the Telemedia prospectus is that the increase in profits after nationalisation of Telemedia will not surpass the running $20 million annual cost of nationalisation, even if the projections are not downwardly adjusted for the reduction in tax revenues. In simpler terms, even the government believes that nationalisation is and will be a net loss. Nationalisation, by the government's own projections, will not be a more efficient allocation of scarce resources. If this is the case, what is the logic in seeking to entrench nationalisation when it is not in the public's economic interest?
If the underlying rationale of the Ninth Amendment does not make economic sense and is not in the public interest, then why do it? Is it more important to have power and control, even if it costs the people of Belize $480 million plus an extra $100,000 per day to do so? Would this scarce money not be better utilised for and invested in the people of Belize if it were applied directly to improving education and enabling job opportunities?
For further information on this topic please contact Christopher Coye at Courtenay Coye LLP by telephone (+1 345 814 2013), fax (+1 345 949 4901) or email ([email protected]).
(1) Supreme Court Claim 445/2008.