Is Airports Holding Ltd a Good Corporate Model?

Opinion

Corporate governance

State capitalism is not a problem as such as long as it is productive and efficient as we have seen in South Asian countries. It is a problem when it creates monopolies or oligopolies in some sectors of the economy, thereby eliminating competition, decreasing meritocracy, and encouraging inefficiency.

By Prakash Neerohoo

Before examining the governance issues, it is necessary to compare the previous corporate structure of AM with the new corporate structure set up in August 2021, whereby a holding company (AHL) owns and controls a number (22) of subsidiaries, the most important of which is wholly owned AM. Other subsidiaries are, inter alia, Airports of Mauritius Co Ltd (aerodrome operator), Airports Terminal Operations Ltd (terminal operator at Plaisance) and Mauritius Duty Free Paradise.

Public company

Since 1967, AM used to be a public company whose capital was owned by the State of Mauritius, as a majority shareholder, and minority shareholders represented by private companies such as Air France, Air India, Rogers Co, and private individuals. The majority shareholder (government) appointed the board of AM, its CEO and department directors. It also wielded considerable influence on corporate decision making as AM was considered a strategic asset for the country with its dominant role as the unique local carrier in civil aviation and tourism. Accordingly, the government always had a crucial role in determining the company’s fleet size, the routes to service and the terms of the contracts of directors.

To keep a tight rein on the management of the company, each successive government has appointed individuals aligned with its own interests as chairman and CEO. This has resulted in a revolving door scenario, with these positions changing hands every five years. Appointments in top management positions followed a political cycle with directors in and out according to government’s wishes. Sometimes, within a five-year term, the company had changed its chairman and/or CEO due to some major corporate misfeasance.

Notwithstanding the imperative of political control over a strategic asset, the company managed to perform reasonably well, ensuring timely and adequate services on all routes. Despite some loss-making decisions such as the aviation fuel hedging contracts, abuse of free airline tickets by staff and directors, and overstaffing in some areas, the company was seen as the jewel in the crown, a standard bearer for the country abroad and a pool of skilled employment opportunities for the middle class.

Change in legal entity

Prior to the financial crash caused by the Covid pandemic in 2020-2021, which grounded all commercial flights, the company’s model of being public entity listed on the Stock Exchange with a fiduciary duty to shareholders was somehow working. The pandemic-induced insolvency put the company into voluntary administration for 17 months until September 2021, at the end of which some poor decisions were made, namely:

• the sale of four aircraft at a staggering loss of Rs 3.377 billion (net book value of Rs 3.650 billion less proceeds of sale of Rs 273 million),
• the reduction of skilled staff through voluntary retirement or layoffs, and
• the change in legal entity from a public company to a private company delisted from the Stock Exchange.

The divestment of stakes held by private minority shareholders in the company allowed AM to become a State-Owned Enterprise (SOE) 100% under the control of the holding company AHL in October 2021. This new corporate structure is supposed to bring cost savings and efficiency gains by integrating different lines of activity (airport management, duty free shop, civil aviation, Cotton Bay hotel, etc.) under one banner. At the end of June 2023, AHL’s turnover reached Rs 33,5 billion with a pre-tax profit of Rs 4 billion, which made it the third largest company in the Top 100 Companies.  In December 2021, the Mauritius Investment Corporation (MIC), a subsidiary of the Bank of Mauritius, injected Rs 25 billion into AHL, securing up to 49% of its share capital, which means that 51% (or Rs 26 billion) of the share capital is owned by government and its financial institutions.

Out of MIC’s Rs 25 billion, Rs 12 billion was used to repay a loan that AHL obtained from the government and Rs 13 billion was used to buy up government’s shares in AM. If MIC sells its shares bought for Rs 25 billion at a higher value (say Rs27 billion as AHL CEO suggested in a press interview), then it would realize a capital gain of Rs 2 billion. But to whom would it sell its shares? To whom would it sell its shares? Private investors are not an option as the government has divested all private investors from Air Mauritius. If the government were to entertain the idea of a private investor purchasing MIC’s 49% share capital in AHL, it would undermine the core objective of establishing AHL as a state-owned holding company.

The CEO of AHL has resigned from the board of AM, a wholly-owned subsidiary, but retains his position as the head of the holding company. His successor on the board of AM remains accountable to AHL, the parent corporation, indicating that AHL maintains effective control over its subsidiary.

Association and Control

Those who are familiar with the concept of Association and Control in corporate law know that a holding company has a de jure control over its wholly owned subsidiaries and can issue shareholder directives for the proper management of affairs. Furthermore, considering the related party relationship between the parent corporation and subsidiaries, directors of the holding company can exercise de facto control over the subsidiaries by influencing their decision-making.

This is especially true in Mauritius where corporate governance rules are not strictly followed in terms of independent boards of management. Suspected government interference through board members appointed by the responsible minister seems to have blurred the boundaries between professional, independent management and oversight boards.

The relationship between a holding company and a subsidiary is clear: the parent sets the policy while the subsidiary delivers the goods. Association of related legal entities under the umbrella of a holding company to ensure control of subsidiaries is not a mystery in business. It is a structure where administrative (operational) powers are delegated to subsidiaries while the parent holds the purse and makes all strategic decisions. In any corporate group, the parent makes strategic decisions and delegates execution to subsidiaries. Especially when both the holding and subsidiaries are owned 100% by one shareholder (the State).

Associated corporations do not deal at arm’s length as one can influence another’s plan or act significantly or decisively. The general presumption in corporate law is that persons not dealing at arm’s length will be tempted to make arrangements that are not dictated by bona fide business considerations but by other considerations such as a desire to ensure patronage, rigging procurement bids to award contracts to cronies, inflating contract value to maximize profits, offering inter-company services for more than fair market value consideration, and shifting funds across associated companies in a thinly veiled cross subsidization exercise (winners bailing out losers).

State capitalism

AHL is not just a corporate group operating like any other conglomerate in the economy. It is emblematical of a model of State capitalism that has been developed around SOEs over the last 40 years. Many SOEs and State-owned conglomerates have been set up: AHL in civil aviation and airport services, Maubank and NIC in finance and insurance, Landscope Mauritius in real estate development, Mauritius Telecom in telecommunications, NHDC in social housing, State Trading Corporation in the import of commodities, SBM Holdings in banking and finance, etc.

All those SOEs are controlled by the State and managed by a nomenklatura.

The nationalisation of AM by buying out private shareholders is a significant development as it does away with the mixed economy approach in some areas. A new arm of State capitalism is MIC, which acquired wholly or partly private companies through the purchase of shares or the direct acquisition of assets (e.g., the purchase of Omnicane Smart City).

State capitalism is not a problem as such as long as it is productive and efficient as we have seen in South Asian countries, especially China, where they have contributed to economic growth through scientific and technological innovation. It is a problem when it creates monopolies or oligopolies in some sectors of the economy, thereby eliminating competition, decreasing meritocracy, and encouraging inefficiency.

Mauritius Times ePaper Friday 15 March 2024