Crony Capitalism and Disproportionate Risk Taking

The Demise of the BAI Group of Companies

It is impossible to do business in most of the developing world without being attuned to the politics. Pundits in the rich countries should not be too arrogant about this… another important group of entrepreneurs in Washington DC are lobbyists trying to get fat contracts for their defence industry clients. But the scale of the interplay between business and politics in poor countries dwarfs that in rich ones, and can be terribly damaging.

— The Economist

It would not be exaggerated to state that Mauritius seems to be having more than its fair share of corporate scams in the light of the BAI/Bramer Bank saga which is presently unfolding with its yet unpredictable consequences.

The Air Mauritius black money scandal and the nearly Rs 900 Million which had simply vanished from the books of the Mauritius Commercial Bank, not to mention the disastrous “hedging” experimentation at Air Mauritius and the State Trading Corporation are still fresh in our minds. To which we now have to add the cases of the infamous Airway Coffee and some others. Interestingly in none of these cases, except maybe for one person no one has yet faced trial even when it has been clearly established that criminal offences had been committed. But this is not our concern here.

Although, as stated in the opening quote above, the interplay between business and politics is not a practice reserved to developing countries, there is no doubt that the level of risks associated with these close encounters are directly related to the role and strengths of institutions such as Regulators or even the basic respect for contractual engagements. In extreme cases where these institutions are almost marginalized either because they are inherently inefficient or where the political masters function in virtually incestuous relationship with the market dominant minorities, the resulting regime is what is described as Crony Capitalism. These are characterized as corrupt symbiotic alliances between the political leadership and the bosses of leading corporate bodies. For many analysts the financial crisis which devastated the economies of the “Asian Tigers” in the 1980s was principally due to the prevalence of such crony regimes in these countries.

In Mauritius the growing role played by government in the financing of large public infrastructure projects, coupled with an opening of the economy to international investors and the concentration of economic power within the hands of a few families over the last decades, has created the objective conditions under which such crony capitalism could flourish. Whether this would actually happen then hinged on whether there would be the political will to strengthen institutions and allow them the independence to function properly. Unfortunately the long list of “scandals” which we have witnessed and the absence of decisive outcomes stand as living testimony to the absence of even the slightest effort in this direction.

In fact the latest scandals which are now being brought to light after the recent change of government and the fall of one of the largest conglomerates in the country are all being blamed primarily on the “incestuous” relationships between high-ranking members of government and the heads of those corporations. In the case of the BAI and Bramer Bank controlled by the Rawat family, the close relationship between the family patriarch and the former Prime Minister was common knowledge and indeed the subject of many comments in the press over a long time. The fall of the “BAI Empire”, as some press reports have been quick to describe the consequences of the government’s decision to effectively pull the plug on the activities of the BAI conglomerate, provides a case study of the nefarious effects such intimacy can provoke. The scale of the disaster both in financial and reputational costs to the nation cannot be properly assessed if only because it remains a function of the way in which its aftermath will be handled by all the parties involved. In light of the preceding remarks about crony capitalism and the role of institutions it would be interesting at this point to consider the following issues.

There are four stages to risks management: identification, mitigation and avoidance, financing and crisis management. In the case of the BAI Group the first two stages were carried out during the Navin Ramgoolam government through the on-going regulatory supervision process by the Financial Services Commission and the Bank of Mauritius. Whereas the new government, having in its own deliberate judgement decided to act in the manner that it has, is now having to deal with stages three and four.

Based on current information available to the wider public the following will sum up what seems to have happened during the previous regime.

Risks Identification, Mitigation and Avoidance

First the suggestion to the effect that these businesses were set up with the express intention of “robbing the poor people through the running of a Ponzi scheme” has to be dismissed as outrageously farfetched.

Admitting that such a deliberate scheme could have prevailed for so long in Mauritius under several governments would make a mockery of all our pretence of becoming a major regional financial centre. On the other hand, a more interesting angle would be to consider how a financial institution which was convinced that it had the unconditional support of government (since 2005) has been incentivized to stretch its risk tolerance – to what has ultimately proved to be unsustainable limits.

When the oft-quoted report of the IMF pointed out the high level of risks associated with the intolerable levels of interparty transactions within the BAI Group, it is now established that the regulators did take action to direct the company to address the issue. This is a clear indication that the regulators were alive to the situation and would surely have detected the other structural weaknesses resulting from the high level of risk exposure. In this case however, it is most likely that they turned a blind eye to those risks because of either explicit or implied threats from the “highest quarters.” This is an important point for those who are genuinely interested in drawing the right lessons from these events.

The regulator, at least as far as the insurance business was concerned, does not seem to have failed in the identification of the risks nor possibly in its recommendations for mitigating them. They can surely be blamed for having “cowed down” to the political pressure. But then again, given what we now know, who will blame them?

Risks Financing and Crisis Management

Following the decision taken by government since last week the process has now entered phases three and four i.e. financing and crisis management.

With regard to financing, the Minister of Finance has clearly indicated that it is the government (taxpayers’ money) that will ultimately bear the costs of the losses resulting from the BAI Group’s debacle. He has taken the commitment that no policy-holder or depositor at the bank will bear a financial loss as a result of the events. Although some acute observers have raised the question about whether such assurances from the Minister refer to the principal only or will also include interests (or premiums, it is generally believed that both components will be covered.

An important twist however is the way in which both the Minister and the Conservator seemingly acting in concert have done a Ponce Pilate act as far as the Super Cash Back Gold Policies are concerned. Those who have invested in this scheme would presumably be excluded from the remedial measures being taken by government. The catch lies in the fact that if this scheme was approved by the FSC as an insurance product then one can expect some tough legal challenges to this decision of the Conservator to discriminate between two sets of policy-holders.

Last but not least, when it comes to crisis management actions taken immediately following the event will have a considerable impact either adversely or advantageously on the final magnitude of the losses incurred. Unfortunately the handling of the whole crisis, especially in its communication being marred by contradictory statements made on a daily basis, does not convey the assurance that a proper road map had been prepared in order to deal effectively with the consequences of such an action. This will definitely result in escalation of the costs related to the closure of these companies.

 

* Published in print edition on 11 April  2015

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