Strong institutions key to privatisation success
The IMF as usual made a call this week for the need to privatise taxpayer owned Malawi Savings Bank (MSB). MSB has undergone many reforms from what used to be the Post Office Savings Bank to a full-fledged commercial bank with tentacles across the country. What I find problematic is the idea that privatisation is a solution to all poorly performing State-owned entities while we ignore lack of strong institutions as key to success.
One argument put forward to getting rid of taxpayer ownership of MSB is interference in its decision-making process. Cases of huge loans that have been defaulted are cited as one line of the argument. This is seen in the context of political interference I suppose. If I draw some parallels, and look at how Air Malawi collapsed. While not ruling elements of political interference, a clear case of poor management can be linked to how the airline collapsed. Interestingly, the new airline is actually a joint venture of Ethiopian tax and Malawi taxpayers since the two governments still own the new airline. To some, it looks like privatisation or the so called public-private sector partnerships. We have too many airlines in the world that are owned by taxpayers, the biggest are in the developed world.
Not all public enterprises can suffer from political interference in the presence of strong institutions that enforce sound corporate governance including the way boards are appointed. For example, the process of appointing the Governor of the Bank of Israel, does not necessarily depend on Netanyahau but a tough vetting process. There are a lot of checks and balances that ensure that the executive does not wield so much power. It is different in this country, and that could be the sole reason that public enterprises rarely perform. Privatisation, while good in principle, still needs systems that ensure managing institutions, while accountable, operate with due independence and practical application of relevant statutes.
When one looks at decisions made by banks, like the one in question with respect to loans, periodic forensic audits by regulatory authorities are made. Any suspicious Act that would put the financial system and the interests of depositor at risk normally is dealt with under the Banking Act. Did regulatory authorities fail in detecting such bad loans that could lead to insolvency? And why should privatisation be a solution? Maybe we should be asking serious questions as to the efficacy of the Banking Act instead of jumping into privatisation of MSB. The efficacy of the Banking Act can be evaluated in terms of how individual senior managers are held to account of their actions by the regulatory authority, not necessarily the board of directors.
It is a fact that MSB has a wider network in the country, particularly in the rural areas where the majority of the unbanked live. Privately owned banks have kept away from such markets with their obsession for quick money available through government debt stocks. Privatisation of MSB might as well leave the few rural banked population without a bank within reach given the appalling road infrastructure.
Strong institutions, particularly with respect to bank regulation is what the country needs otherwise we will end up “privatising the central bank”. Senior bank managers must be held to account and prosecuted if their decisions put the entire financial system at risk. A single bank failure can lead to a contagion effects but to apply a one size fits all approach to reforming public enterprises has limitations. Examples abound. Most of the global banks in the Western world that were bailed out during the 2008 Western Financial crisis, sometimes dubbed “global crisis” are privately owned. Proponents of privatisation of our banks never saw it coming, unfortunately. I would take such privatisation medicine with some milk in case it has some undesirable toxins given its side effects.
We have privatised a number of entities since the wave started at a serious level in the mid-1990s. The process has had mixed success and there are a lot of entities that have miserably failed simply because ownership was acquired by those entities that barely deserved it. All I am saying is that strong and effective institutions that deal with graft, a by-product of privatisation to some extent effectively are indispensable if such processes are to yield the benefits of free enterprise.
