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Business objectives shape governance

Thursday, September 13, 2018

The popular complaint re: the cause of the failure of Petrotrin and, in general, the on-shore state enterprises is poor or lack of governance. The criterion used is that these enterprises are not financially self-sustaining and depend on transfers from the State. This poor or lack of governance is said to encourage sustained political patronage and corruption. The fallacy of this complaint is the assumption that governance is synonymous with striving for financial self-sufficiency in carrying out the enterprises’ businesses. Tony Fraser reminds us of a comment by the eminent economist, Frank Rampersad.

“It (government) has not prescribed (economic) performance criteria for state enterprises, nor enforced accountability. In short, State enterprises were by and large treated as spending divisions of the public sector, but operating under a corporate form of organisation.”

In other words, the objective of the governance of these state enterprises is not economic efficiency, financial self-sufficiency. In general the on-shore private sector cannot provide the required number of adequate jobs to satisfy the 96 per cent of the work force. Hence, state enterprises, make-work programme and the like, are so governed as to also provide as many jobs as possible, which, as Frank Rampersad tells us, are really spending divisions of the public sector operating as corporate organisations. It is noteworthy that some 50 per cent of the annual budget is allocated to subsidies and transfers. Hence, the finances of the State’s economic/social activities are intertwined with those of the state enterprises.

Petrotrin was formed over the years from an amalgam of companies owned originally by oil majors operating locally. Our governments bought these companies to save jobs when the majors sought to leave the country, as the companies became un-competitive or no longer fitted the global plans of the majors.

In short, Petrotrin was created with a governance objective to save and maintain the jobs of an over staffed organisation. This encouraged the growth of a now very powerful union that, given this objective of the State, succeeded in winning exorbitant salaries/wages for its members—such remuneration of Petrotrin forms 50 per cent of its operating costs.

The history of the neglect of investment in exploration and production, the drastic failure of some of the refinery upgrades and projects and the losses of the company are now in the public domain. Still, no government made any serious move to restructure the company, to change the objectives of its governance to include economic efficiency. However, the looming loan bullet-repayments, which are of a size that, as the Prime Minister says, can imperil the finances of the country, have forced this government to act, to attempt to make the company into a globally competitive oil producer.

To do so it commissioned a series of consultancies and eventually appointed a board with the directive to come up with a plan to restructure the company given the new governance objective of financial viability. The plan now on the table is the shutting down of the refinery, export of the company’s crude oil, investment to improve oil production which is supposed to make the company viable—some 1700 staff will be retrenched.

Petrotrin did not become financially unviable because of poor governance. It achieved that state because in meeting with its governance objective, demanded financial support from the state which is not now available. Hence, there was a change of governance objective- the result is a restructuring of the company into oil exporting, importation of refined products for local use and distribution to the region.

In general, our government, in its policy of governance of the economy, uses the excess of foreign exchange income earned over that spent on imports on social support, identified in particular in its massive subsidies and transfers. However, this excess is what would be required to diversify the economy and, if so, will be diverted away from consumption and will impose hardships on and entail sacrifice by the population.

Recently, the government has been talking about building in partnership with the Chinese (20/80 ownership) a dry-docking facility in La Brea, in competition with similar regional docks in Jamaica, Curacao, the Bahamas, Colombia, Mexico and the US Gulf Coast to service the Panamax ships passing through the Panama Canal.

Together with this the plan is to build an industrial park at Pt Lisas (with a Chinese loan) to house some Chinese companies and others, even though the billion dollar park at Tamana stands idle. These are claimed by the government as contributions to our diversification effort.

What has not been discussed is the economic growth and development plan within which these projects are supposed to fit- the strategic governance of our economy. The ultimate aim of our diversification should be to create clusters that eventually derive their competitiveness from knowledge driven innovation. The provision of jobs in building plant and its operation is insufficient, it is unsustainable even as we acknowledge that Pt Lisas is profitable now, but unsustainable. This development plan demands the creation of institutions which I have defined as the Innovation Diamond.

However, worldwide experience has demonstrate that it is difficult for developing countries to build a complete innovative industry, the whole value train, on its own. Like China, the advice is that we join existing global value chains at the lower end of the reward structure, even by providing cheaper labour or exploiting any comparative advantage (location) while providing the on-shore institutions that can provide the knowledge, training, the R&D, the innovation that allow us to move up the value chains. Economic growth and development are not simply remaining as plant or dock operators.

The question then to our government planners is; though the dry-dock and the Chinese companies at Pt Lisas will be parts of global value chains, which we will join at low levels of rewards, what is being put in place so that we can move up the value chains? Moreso, how do we spin off the technology so gained and created into local innovative clusters?

This is what economic diversification is about.

Mary K King

St Augustine


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