Comment: Is privatization only happening in the Maldives?

Privatization is one of the economic policies of modern governments, be it large or small, democratic or authoritarian, capitalist or socialist. Privatization is a global phenomenon. The trend towards privatization can be traced back to the 1970’s and 1980’s.

Firstly, it was President Jimmy Carter who in the year 1976 said American Administration ‘lacked administrative skills’ for the performance of daily work, which shook entire public administration and changed its traditional performance. This led to  the emergence of new approach in the discipline of Public Administration called ‘New Public Management’ (NPM) perspective.  The successor of Jimmy Carter was Ronald Reagan, who was convinced that the administration must undergo changes to tackle new problems. America was facing huge budget deficits and inefficiency, which Reagan accused as the result of the misallocation and mismanagement of public funds.
The idea which promoted privatization was that government is not the solution to the problem, but rather it is the problem to the solution.
In England Margaret Thatcher, then prime minister, was faced with similar situations. The public spending was increasing, as productivity and efficiency of public bodies were in decline. This also added fuel to the growing idea of free markets, deregulation and privatization. The government which governed least, or the ‘rolling back of the state’, was the idea behind privatization.

What about communist and socialist states?
For a long time China was regarded as an ‘inward looking’ and isolationist country. During the revolution in 1949 chairman Mao was much inspired by the writings of Marx and Lenin which led to establishment of the communist state. However in the year 1979 Chinese leadership felt it must compete in international trade to help boost their economy. Today China is regarded as the world’s second largest economy, with growth rates around 10% per year.

With the fall of the Berlin wall in the year 1991 the Soviet Union disintegrated. This marked the end of the rivalry between communist Russia and Capitalist America, and was regarded as a triumph for democracy and capitalism. This made the whole world believe that democratic states are the best states and capitalism is the best economic policy. To perpetuate the idea of capitalism and democracy which favored privatization, international institutions such as IMF, World Bank and WTO promoted ‘Washington Consensus’ in the interest of the West.

It is also interesting to note that the so-called socialist state of Cuba, under the leadership of Raul Castro, talked in favor of privatization. Cuba planned to layoff half a million state workers stating that too many workers with low productivity burdens the budget.

The Indian case
Indhira Gandhi was the champion of Indian socialism during the 1960’s. The word ‘socialist’ was added into the Indian constitution to direct its policies towards socialism. The nationalization of 14 Indian banks and its coal industry came when socialism in India was at its peak. However India entered into a debt trap by the end of 1990’s because of excessive wasteful public expenditures and inefficiency in the public sector. Therefore India adopted the new economic policy Liberalization, Privatization and Globalization (LPG) in the year 1991 under the leadership of the then finance minister Manmohan Singh.  Today India is regarded as one of the major emerging economies of the world with the growth rate of around 8% per year.

The Maldives
Privatization of the Maldivian economy has been a hot topic since 2008, with the arrival of the first popularly elected government under the leadership of Mohamed Nasheed. Since this government came into power one of its economic policies has been privatizing the economy. The sale of Male’ International Airport to Indian company GMR was one of the very first steps in this direction. As Maldives tries to expand its tourism sector the need for a modernized airport and efficient management arises to compete with its counterparts, such as neighboring Sri Lanka. The airport was not developing enough to compete and give decent service to the tourists. The airport remained as it was without a major improvement in infrastructure.

In the upcoming year the current government has decided to privatize 5 more companies. This includes STELCO, Maldives Post Limited, Island Aviation, Housing Development Corporation and Maldives In-Flight Catering. However the privatization of these 5 companies was rejected by the parliament, which stated that it violates Maldivian financial laws.

There were plenty of objections to privatization in England and the US during 1980’s, protests in India during the 1990’s and also in Maldives since 2009 against the idea of privatization. I acknowledge the protestors also have points to prove, such as the private sector‘s objective to maximize its profit at any cost and the widening of income disparities because of private sector.  I shall talk about the process and defects of privatization in another occasion.

Therefore the idea of privatization is a global phenomenon and is happening in most countries in the world. It is happening because of inefficiency, delay, corruption, red tapism and nepotism in the public sector, in the interest of delivering results the people expect.

What comes to mind is a couplet written by English poet Alexander Pope. He wrote, “For forms of government let fools contest; whatever is best administered is best.” Therefore it is very clear that whether it be a democratic, authoritarian, socialist or communist government, at the end of the day if that government is not able to administer and live up to its promises, then that government will lose popularity.


Government signs Male International Airport to GMR-Malaysia Airports consortium

The government today signed a 25 year lease agreement with the GMR-Malaysia Airport Holdings consortium to develop and manage Male’ International Airport, hours after parliament voted in favour of a bill requiring parliamentary approval of lease transactions with overseas parties.

Chairman of the Privatisation Committee, Mahmoud Razee, claimed parliament’s decision today would not impact the signing “as it yet to be ratified by the president.”

The signing ceremony was scheduled for yesterday but was derailed at the eleventh hour after reported disagreements between board members of the Maldives Airport Company Limited (MACL), the organisation which currently manages the airport.

Minivan News understands the four MACL board positions were reshuffled by the government last night in an effort to proceed with the signing today, although this has yet to be officially confirmed – new chairman Ibrahim Saleem, also Chairman of the Maldives Tourism Development Corporation (MTDC), signed the contract today in place of former chairman Ibrahim Nooradeen.

An official of the President’s Office observed to Minivan News that as the MACL is a public company with 100 percent of its shares owned by the government, “it is the duty of the board to act in the interests of the major shareholder.”

Minivan News is currently seeking comment from the board members.

Under the new agreement, the consortium will establish a new local company to manage the airport which will be operated by Malaysia Airlines Holdings. The Maldives National Defence Force (MNDF) will remain in charge of security, and immigration will remain under government control. A briefing document obtained by Minivan News also indicates that the agreement comes with a clause that no staff can be made redundant for two years unless for “disciplinary or performance related reasons.”

The deal has proved controversial with four opposition parties signing a statement on Saturday evening condemning the decision on nationalistic grounds, arguing that handing management of the airport to a foreign company compromised the sovereignty of the Maldives.

Deputy Leader of the main opposition Dhivehi Rayyithunge Party (DRP), Ibrahim Shareef, said last week that the DRP would not honour “shady deals of this type” if it came to power in the next election, unless they were approved by parliament, while today another of the party’s deputy leaders, Umar Naseer, said the deal was “ridiculous” and would result in the dismissal of half the airport’s 3000 staff.

Speaking briefly to the media following the signing, Managing Director of GMR Infrastructure Sri Pathi hinted acknowledgement of the controversy, stating that “airports always belong to the people – never to us.”

“Please don’t think we came here to take over the airport,” he said. “We perhaps become the trustees – but emotionally in terms of ownership it belongs to the people. We are of course here to invest our money and make a business deal on the best terms possible – but the airport still belongs to the people. We make a commitment that we will operate the airport to the best international standards that we can, and prove to you that the trust you place in us will never be betrayed.”

Managing Director of Malaysia Airports Holdings, Basheer Ahmed, noted that the majority Malaysian-government owned company managed 39 airports in Malaysia and several overseas, including airports in Hyderbad and Delhi.

“Every country needs an excellent airport because it is the visitor’s first impression,” he said.

The briefing document obtained by Minivan News contains forecasts of the government’s expected earnings (reportedly provided by GMR) from the airport over the lifespan of the contract. It reveals that a majority of the predicted revenue, a major factor in calculating the NPV (net present value) used to determine the successful bid, derives from the 27 percent fuel revenue share once the airport is completed in 2014:

  • 2015-2020: 12.8m gross + 74.25m fuel = US$87.05m per year
  • 2020-2025- 17.02m gross + 90.99m fuel = US$108.01m per year
  • 2025-2035 – 20.43 gross + 108.27m fuel = US$128.7 m per year

The document contrasted this with the dividends paid to the government by MACL over the last three years, noting that the majority of the dividends paid in 2008-2009 were achieved “by taking a loan.”

  • 2007 – 2.3 million
  • 2008 – 13.3 million
  • 2009 – 5.05 million

On the suggestion that MACL should be allowed to raise finance and invest in the upgrade itself, a predicted US$300-400 million, the document noted that MACL “already has debts of Rf 600 million (US$46.69 million)” and would be unable to obtain further leverage “without a sovereign guarantee – simply not allowed due to the IMF measures.”

The airport was signed to GMR-MAH late this afternoon.

Meanwhile, daily newspaper Haveeru featured an interview with the Turkish-French consortium TAV-ADPM, who have reportedly expressed dissatisfaction of the bid evaluation process “and urged for a re-evaluation of the bids.”

“The newspapers started reporting that GMR won the bid even though we were not told the party who won the bid. We faced many problems, since the two companies in our consortium are also listed in stock exchange,” Haveerru reported head of the consortium, Gusiloo Betkin, as saying. “It cannot be said that a certain party won the bid without signing the concession agreement.”

Betkin expressed disbelief to Haveeru that the GMR-MAH bid could offer the government 27 percent of fuel trade “without facing any loss. We are a party that provides services to 170 million passengers annually in 39 airports. We also have experience in fuel trade,” Betkin told the newspaper.

TAV-ADPM had offered 16.5 percent of fuel trade to the government, he noted, the highest deemed feasible, and that at 27 percent, flight arrivals to the Maldives would be affected by rising fuel prices.

“The main thing is the fuel. If the fuel prices are high, no one will take in fuel from there – Maldives will lose that income. The airlines will also focus to other destinations,” Betkin told Haveeru.

The government’s Net Present Value calculations:

    Upfront fee: US$7m
    Variable concession fees share – non fuel – 2011-2014: 31%
    Variable concession fees – fuel – 2011-2014: 16.5%
    Variable concession fees share – non fuel – 2015-2025: 29.5%
    Variable concession fees – fuel – 2015-2025: 16.5%
    NPV: 454.04
    Upfront fee: US$78m
    Variable concession fees share – non fuel – 2011-2014: 1%
    Variable concession fees – fuel – 2011-2014: 15%
    Variable concession fees share – non fuel – 2015-2025: 10%
    Variable concession fees – fuel – 2015-2025: 27%
    NPV: 495.18
  • Unique-GVK
    Upfront fee: US$27m
    Variable concession fees share – non fuel – 2011-2014: 27%
    Variable concession fees – fuel – 2011-2014: 9%
    Variable concession fees share – non fuel – 2015-2025: 9%
    Variable concession fees – fuel – 2015-2025: 9%
    NPV: 266.94