“Burden sharing should be the fundamental guiding principle of the bailout of enterprises”

Interview: Rajiv Servansingh

* ‘How bailout funds are transferred and the conditionalities attached to them will likely be a defining moment for the present government’

* Amendments to Worker’s Rights Act: ‘Any government should only have recourse to such exceptional measures only in dire and inevitable circumstances’

Rajiv Servansingh shares his views on the difficult period awaiting the country post Covid-19. He emphasises that there must perforce be burden sharing to face the economic impacts, and that it is the State that must be the driver as it is providing the bailouts to keep businesses afloat. It has to have a solid team to negotiate with the stakeholders and perhaps the most important part of the package will be insisting on the conditionalities that must be attached. He agrees with the suggestion of rigorous oversight by a Parliamentary Committee to ensure greater transparency and accountability, so as to avoid repeating the mistakes made with disbursement of the stimulus package in the wake of the 2008 financial crisis.

Mauritius Times: Politicians and economists have for weeks now been expressing serious concerns about the economic impact of the pandemic that has come to worsen an already bad situation pre-Covid-19. Do you also think it’s going to be as bad as they suggest it would?

Rajiv Servansingh: You do not need to be a rocket scientist to understand that when virtually the whole global economic activity is deliberately put on hold for a period of more than two months, the consequences for all nations will be close to catastrophic if special measures are not taken to deal with such an unprecedented situation. In Mauritius, which is a small island developing state with an extremely open economy, dependent on foreign trade and investments, the effects can be devastating. In a no-action scenario one can expect a severe recession if not an economic depression and subsequent social upheavals.

Governments all over the world have reacted by providing liquidity to businesses as well as to households to deal with the first effects of the calamity – to prevent businesses going into bankruptcy and families going without basic necessity. Every thinking person would therefore be worried about what would happen next although there is no need to panic.

In this unprecedented situation, novel and previously untested solutions would have to be deployed. As Franklin D Roosevelt once said about the effects of the great depression: the only thing we need to fear is fear itself.

* Are you worried that the real pandemic danger might come from its social impacts with some 100,000 unemployed by the end of the year, as suggested by the current Minister of Finance? That s may even be worse than the 1970s, isn’t it?

My understanding of what the Minister meant was that such a dramatic situation could develop if nothing was done to at least mitigate the most immediate and serious consequences of the economic crisis following the pandemic.

The figure of 100,000 unemployed would indeed represent the kind of situation that we had in the 1970s when we had around 26% of our active population out of work. The notable difference, however, is that in those days the calamitous economic situation was a result of sheer mismanagement of the national economy and not the result of some external factor beyond anyone’s control as is the case with the present Covid-19 pandemic.

* It is not known whether the Finance minister has factored in the likely consequences of the Covid-19 Act, in particular those in relation to the amendments to the Workers Rights Act that might facilitate redundancy in the private sector, in his unemployment calculations. Do you see any rationale in those amendments at this point in time?

As I said earlier, the minister’s statement regarding the 100,000 unemployed was just a warning about what could happen if no decisive action was taken. As regards the amendments to the Worker’s Rights Act, it is clear that this is a very sensitive issue especially coming from a government which had actually reintroduced so many of the measures for protection of worker’s rights in the recent past, after the previous neo-liberal regime had got rid of them.

The government has been insisting that these are temporary measures which are being taken in the context of the post-covid crisis. My personal instinct is that any government should only have recourse to such exceptional measures only in dire and inevitable circumstances.

As for the rationale for amendments to the Worker’s Rights Act, I would think that one can only understand it if placed in the context of a major economic crisis. We are not in an autocratic state and are operating in a mixed economy where the greater part of economic activity is in the hands of the private sector.

In all cases where the government will be providing financial support to companies, the primary quid pro quo should be to prevent any forced redundancy. It would nevertheless be unavoidable that many firms would still have to restructure their businesses.

Look at Air Mauritius. I understand that such cases would be referred to the redundancy board where employers would have to justify their claims for such actions. If anyone is claiming that in a context where the economy of Mauritius is on the path of double-digit contraction of its GDP growth and that this will not entail any unemployment, then he should certainly come forward with his magic wand.

* There might not be a causal relationship here, but one cannot however fail to take note that despite an injection of Rs 60 billion, besides the earlier Rs 18 Bn, by the Bank of Mauritius with a view to “ensuring that domestic systemic operators are kept afloat… and that jobs are preserved”, we’ll end up with 100,000 unemployed by the end of the year. Do you find that reasonable and therefore acceptable?

It would seem that some people are suggesting that there might exist a causality between the amendments to the Worker’s Rights Act and ending up with 100,000 unemployed in spite of the Rs60 Bn that the government is proposing to inject in the economy. If we follow through this logic, it would mean that the government would only have to retract these amendments and there would be less unemployment.

I am afraid there is a huge flaw in this line of reasoning – the counterfactual argument is: Even admitting that after investing Rs 60Bn there would still be 100,000 unemployed by the end of the year, then it immediately begs the question of what would it be if government did not actually invest this amount to save lives, jobs and enterprises.

* While we are busy amending labour laws, it’s also being argued that it’s not the time now in the present exceptional circumstances to review the tax system or raise taxes to finance economic recovery programmes. Shouldn’t there be some form of burden sharing in these challenging times. What would you have proposed?

I have been a long time supporter of a revision of the Flat Tax and for a more progressive taxation in the country, and this certainly remains one of the leitmotifs underlying my thinking about the new economic development model for our country.

However hailing a new progressive tax regime as a solution at a time when the corporate sector is facing a calamitous financial future would simply constitute a misguiding, ineffective, not to say demagogical statement. Especially when it comes from quarters which have actually helped to introduce the Flat Tax and supported it at a time when companies were earning huge profits.

As to the second part of your question, there is no doubt however in my mind that burden sharing should be the fundamental guiding principle of the bail out of enterprises following this crisis.

* As regards the Mauritius Investment Corporation Ltd, this Special Purpose Vehicle which will operate, according to the Bank of Mauritius, “independently within the parameters of a strict governance structure” will provide “support through a range of equity/quasi equity instruments in view of ensuring that domestic systemic economic operators are kept afloat”. There is no mention of conditionalities attached to that support. What do you think should have been the correct way to go about supporting our economic operators so that we do not repeat the mistakes of 2008?

Let us reiterate the point that the world over there is overwhelming consensus that governments need to intervene massively with financial assistance to enterprises for saving those companies which would be viable under normal circumstances, to help households who suddenly find themselves deprived of any earnings and to support the more vulnerable groups in society.

In Mauritius the government has set up the Mauritius Investment Corporation as the principal instrument through which bailout to enterprises will be provided to economic operators. These, we surmise, include the large companies from the organized (corporate) sector as well as SMEs and other independent producers.

Providing bailouts for the corporate sector is probably the one that will retain the most attention and rightly so. How these funds are transferred and the conditionalities attached to them will likely be a defining moment for the present government and a test of the will of the State not to fall into the trap of “socializing losses while profits remain solidly privatized”.

In an article which was published some two weeks back in the local press, in which I developed the concept of “conditionality bargaining” which should govern the whole process of bailout, I cited the following quote from a commentator: “Lest we forget and do what was done in the 2008 financial crisis, the State is and must be seen as the real hero that it is in the present situation rather than a naïve patsy.”

This is indeed the litmus test of how public funds will be used for saving private, often family-controlled companies from otherwise inevitable bankruptcy. Every case will have to be examined for its merits and would have its own characteristics that will define not only the amount of financial support that it will receive but probably most importantly the conditions which will be attached to such transfer of funds.

* And how do you propose that the above could be actually implemented?

First, let us underline that the successful implementation of such an approach will not be possible without a strong State negotiating team of professionals and people who have demonstrated skills for carrying out the expectedly harsh negotiations.

Again referring to my proposal on “conditionality bargaining”, I have suggested five conditions which need to be fulfilled by companies which wish to benefit from the State’s financial support:

(1) beneficiary companies that generously distributed non-taxable dividends to shareholders over the past 5-6 years should call on those large investors to contribute to a recapitalization of their companies;

(2) companies which are provided with soft loans and other forms of financial packages should not distribute dividends for as long as those loans and other facilities have not been fully repaid;
(3) part of the funds being allocated to those companies would be fully convertible into equity at some future time at the discretion of the State;

(4) beneficiary companies would not be allowed to proceed with any share buybacks for as long as they have not refunded loans and other facilities extended under the package; and

5) the State should have board representation for as long as facilities have not been repaid.

To these should be added an additional condition that these companies would not proceed with any involuntary redundancy of workers during the next twelve months.

* We do not know as yet how Covid-19 will transform the country and our economy in the months and years ahead. Are you worried that things, whether these have to do with business practices or economic priorities, might get back to business as usual once the menace of Covid-19 is gone?

The jury is still out about how far and deeply the experience of these months of virtually worldwide confinement of people and subsequent seizure of economic activity would impact human/social behaviour in the near future and beyond. There is no precedent, in modern history at least, which can provide some clues about an event of such magnitude.

In my sense though there are three entrenched and dominant trends which will be severely contested in the coming months. What will come out of these contests, however, are not clear, for they will depend on the outcome of what promise to be aptly fought political struggles.

History has taught us that there is no such thing as a smooth uncontested way forward, and only the outcome of political struggles between those who want to maintain the status quo ante (conservatives) and the agents of change (progressives) determines what eventually comes out of such volatile and unstable events as the one we are living through presently.

Accordingly I see a first consequence of the confinement and economic crisis in the return of politics as the prime mover of the struggle either for fundamental changes to come or a return to the status quo depending on the outcome and the forces in play. The failure of the erstwhile system which has witnessed two major crises within a period of a little more than a decade and the severity of the present breakdown do plead for transformative changes.

This return of politics will be at the expense of the primacy of an economic model which has shown its weaknesses in the present crisis.

A second major consequence of the present crisis would no doubt be a questioning of the “conventional wisdom” associated with globalization and its merits as the ideal global economic architecture. Already many of the same nations which were unreserved proponents of globalization are waking up to the harsh realities of a global supply chain which left them totally helpless in the face of a health pandemic.

Globalization was recently described by Robert Lightliser, admittedly a close ally of Donald Trump, as “the blind pursuit of efficiency in the global market at the expense of national self-interest, American jobs and security.” As for Josh Harley, a Rep. from Missouri, he recently described the WTO as “a messianic frame of mind that took hold in the West after the collapse of the Soviet Union.” The “Far Left Review” could not do better.

Not to be left out, Europe has also taken some recent measures, for example, regarding control of foreign investments in certain sectors of its economy which would have been inconceivable in the heydays of the globalization narrative. The gathering storm of a new cold war between China and the West will do nothing to stop this emerging scenario from materializing.

Finally, it is becoming obvious that the changing role of the State in national economies will probably be the defining characteristic of the post-Covid economic structure. The era which started in 1981 with the Ronald Reagan quip during his inaugural speech, that “government is not the solution to our problem. Government IS the problem” seems to have taken a severe blow as people have witnessed the desperation of their governments and their institutions in responding to the pandemic.

The short-sightedness of private companies in their drive for short-term search for shareholder value have left them resourceless as a result of two months of crisis. Their recourse to public funds to rescue them from bankruptcy will no doubt have serious consequences on the claim of the proponents of “unfettered capitalism” as the only drivers of wealth creation and greater “efficiency”.

* Are there particular mistakes of the past we should avoid and make sure that the funds entrusted to the MIC are used to create positive change, and rebuild areas we previously neglected?

I would like to think that the setting up of the MIC is itself an attempt to avoid some of the past mistakes. The “stimulus packages” that were dished out in the wake of the post 2008 financial crisis suffered from a lack of transparency and strict conditionalities which could be monitored along with regular disbursements.

It would indeed be a serious mistake if we failed to create the requisite capacity for the MIC to carry out its mission. To my mind, this institution could be an important tool in redefining our famous public-private partnership to bring it up to page with the new realities of a post-Covid world where, as we have said earlier, the role of the State would most likely once again be prominent as indeed was the case in Mauritius for a long time during the heydays of a successful public-private sector partnership.

* Former Finance minister Rama Sithanen stated in an interview to this paper that a larger recovery fund like the MIC should come about from a “a standalone and robust Act of Parliament with key safeguards, oversight, supervision and control” and a “Special Economic and Finance Committee of the National Assembly” should be set up to oversee the use of these funds, its supervision and monitoring”. That would have been more reassuring, don’t you think?

I have already stated what are some of the preconditions for a successful operation of the MIC. To the extent that the processes and instruments suggested by Rama Sithanen go in the direction of greater transparency and accountability, they should be most welcome. Indeed the suggestions include a recommendation for a special committee of the National Assembly to have a supervisory role on the workings of the MIC. I believe that this is the sort of mechanism to which we should more frequently have recourse, in the name of democracy and accountability.

* What are the odds for a quick economic recovery post the lifting of the more than two months lockdown?

The uninitiated would be at a loss to find their way among the number of alphabets which are being used to describe and predict the pace of future recovery and its consequences.

Between the L, W and V curves being proposed, each one represents a different model. I think in the present circumstances it would be best to take a pragmatic approach and deal with the cards which we have been given.

* Published in print edition on 26 May 2020

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