The Privatization of State-Owned Enterprises and the Stock Exchange

Governments often do not make the most efficient use of some of the key resources available to them. Take the Jamaica Stock Exchange, for example.

 

Without a doubt, the Jamaican government did much to foster our development and registration as a not-for-profit, limited company back in August, 1968. This included convincing twenty-two of Jamaica’s largest private sector companies to list on the Exchange for trading on our first day of operations on February 3, 1969. Ten of these companies are still listed today.

 

Furthermore, the government was our god-father. They provided space and general corporate support for the Stock Exchange in the Bank of Jamaica building from our start-up days right up until we moved into our own premises at

40 Harbour Street

in Kingston in April, 1996.

 

Due to the key role that the Stock Exchange plays in facilitating the country’s financial and investment policies as well as the need to ensure effective regulation and oversight of our activities, there are clear demarcations between our self-regulatory functions and our normal operations.  The Board of the Exchange is drawn from different interest groups and from member dealers. There are also mandatory and non-mandatory committees of the Board, which allow for the efficient execution of the Board’s responsibilities. The mandatory committees are:

• Conduct Review Committee
• Audit Committee
•  Compensation Committee

In accordance with the trend of most modern stock exchange, the Jamaica Stock Exchange became a public company in 2005  and has begun the process of demutualization. The company has now been transformed from a not-for-profit membership organization, to a for-profit, shareholder corporation.  We will remain a self-regulatory organization governed by the Financial Services Commission (FSC) and will probably list on our own stock exchange. 

Privatization

One of the principal purposes for which the Jamaica Stock Exchange was formed is to facilitate privatization. This generally refers to the process by which the ownership of government assets is transferred to private hands or interests.

Jamaica’s privatization programme started in the early 1980s with the main focus, according to the designated implementing agency, National Investment Bank of Jamaica (NIBJ), now the Development Bank of Jamaica (DBJ) of, “divesting  public services and small entities which were a burden on fiscal resources, such as garbage collection services, parks and markets, and public cleansing (e.g. street cleaning, etc.)”

A formal privatization policy statement was enunciated on June 28, 1991 in Ministry Paper No. 34. The policy statement described the basic rationale as, “a fundamental strategy of the government to achieve growth and development within he context of a market economy.”

Ministry Paper No. 34 also sets out the following ways in which state-owned enterprises could be privatized:

§         Sale of enterprise

§         Lease of enterprise or entity

§         Joint ventures

§         Public share offers

§         Management contracts

§         Sale to employees – Employee Stock Ownership Programme (ESOP) of management teams

§         Public auctions

§         Concession – Build, Own, Transfer (BOT); Build, Own, Operate (BOO).

 

The public share offer method is, of course, of great interest to the Jamaica Stock Exchange. We believe that this method has been employed far too sparingly over the years and that there are excellent opportunities available now on which the government should commence or accelerate action.

Since the early 1980s, reliable estimates are that about one hundred and five state-owned enterprises have been privatized of which only eight ended up on the Stock Exchange – three were already listed and five came with the privatization. This is a dismal picture, in our view, representing only 4.7% of the total coming to the market.

There are currently excellent opportunities for privatization utilizing the Jamaica Stock Exchange. Among them, we would cite the following:

• The Airports Authority of Jamaica (AAJ)
• The Port Authority of Jamaica (PAJ)
• Development Bank of Jamaica (DBJ)
• Petrojam
• National Housing Trust (NHT)
• Jamaica Mortgage Bank (JMB)
• National Insurance Scheme (NIS)

The Jamaica Stock Exchange stands ready to work with government to examine or accelerate our privatization suggestions.

What are the benefits of privatization and what are some examples of successful privatization programmes elsewhere? I will deal with these and other issues in subsequent articles.