Reforming the Public Sector

(MGMT 242) – Fall 2020

Session 7: State intervention in Businesses
(Government intervention in business, 9.26)

Tariq Mahmud
Government intervention in business

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State intervention in strategic businesses through capital investments and long term sustenance of
economic growth, with the size of the market being the biggest constraint
• State involvement for access to capital to smaller enterprises
• State as an enabler, e.g. case let’s
• Jurong petrochemical cluster
• Triangin Eco city
• Bail out packages
• Bail out of Japanese company TEPCO
• Leaving king Fisher Air line grounded
• Walking away from Elpida, memory inc.
• State as a Regulator. 3
• Market failures stand out to provide justification for government intervention. Enterprises face
specific difficulties or inherent market constraints necessitating the interventions.
• Limitation of small domestic market, or the lack of access to as well lack of available capital for
smaller businesses are common to many markets.
• Lack of economies of scale are often compounded capital intensive requirements. In view of that
the larger common goods suffers. The population ends up under served.
• There is a complaint of limited access to capital for small enterprises warranting government
intervention. Small and medium enterprise sector.
• Ordinarily face restricted access to capital. It is mostly an un bankable sector with the issues of
business track record and of credit worthiness.

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• As a matter of public policy the government moves in to plug the resource gap. Programmes are
set up both for the economic and political considerations. The government works its incentive
systems and dole out subsidies through the banking system. The Banks may not take up the cost
for higher risks and disproportionate amount of resources needed.
• Rules on capitalization and risk assumption compound the challenge for the banks. State
intervention takes several forms including the setting up of SME banks.

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• SMEs have always been a major pillar of a fairly large number of economies. In China for
instance, in 2011, SMEs accounted for 97% of the total number of licensed companies and
were responsible for 60% of both GDP and industrial output. In addition they paid 48% taxes
and provided 80% jobs.
• Yet not easy for the SMEs to acquire working capital from the normal banking channels.

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• Lack of collaterals and poor corporate governance have kept the normal banking sector away
catering to 10% of the credit needs.
• Credit guarantee schemes launched by the government to provide collaterals and guarantees to
secure loans for SMEs. Tax policies were rationalised to reduce borrowing cost.

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State as an Enabler

• Jurong Petro chemical cluster, unnatural response to unnatural business

• Petro chemical industry with upward, downward linkages was set up at Jurong islands in
Singapore more by dint of policy intent than natural endowment
• A vivid example as how the government its political institutional structures and policies and fiscal
capacity to help shape and nurture the industry

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• Singapore is currently one of the leading and cost effective locations for producing petro
chemicals, despite having neither Oil nor natural gas reserves
• In 1890s shell and Mobil established themselves on the trading out post. During 1960s and 70s
Singapore emerged as one of the to three petroleum refining centres in the world with the
presence of three major oil players, Esso, Singapore Refinery company and Mobil which
operated on three different islands off Singapore

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• Existence of oil refining industry led to the development of down stream integration ; petro
chemical production which required natural gas as the feed stock.
• Value of the business led to the setting up of Petro chemical corporation of Singapore in 1977,
became the largest Petro chemical producer in South East Asia, in the nineties emerged the
fastest growing sector, registering growth of 20% per annum.

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How did it come about! It required plenty of land to begin with.
• The concept of Jurong estate was born as a result of the cluster approach to the sector. Amalgamation of seven
islands, through land reclamation of 3000 hectares
• Provided the berth level to the cluster.
•  Through synergistic vertical and horizontal integration capital investment was rationalised and operational
cost minimised. Upstream feed stock was linked with the down stream manufacturing.
•  There was common sharing of facilities like the waste water treatment, storage and use of jetties. Availability
of feed stock by the government was on competitive basis.
• Plug and play hub at Jurong as of today is booming with activities with over hundred Petro chemical
companies in 2012 with an investment of $ 31.6 billion.
• Led to job creation and the sector has emerged as third largest manufacturing sector after electronics and bio
medical sciences.
• The cluster required a well defined execution plan, made possible through the commitment, clarity and
stewardship of the government. 11
Tianjin, Eco city.( u tube video..3 to 4 minutes)
• Eco city is an example as how the collaborative efforts of two governments, namely the Chinese
and Singapore governments, together with the involvement of quasi public institutions and big
private businesses gave jump start to a nascent development venture.
• It strives to meet the rising challenge of urban development, aims at Eco friendly habitat located
in the Bohai Bay region of china.
• Covering an area of 30sq km, non arable stretch being turned into an Eco habitat ax a futuristic
model to control carbon emission and pollution.
• About 3,50000 people are expected to occupy the city on completion by 2020.

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• Singapore government has shared its extensive knowledge and rich experience in areas like
integrated urban planning and water resource management while the Chinese government is
responsible for the over all coordination and implementation of the project.
• It includes land acquisition, construction of basic infrastructure structure, transportation net
work, public buildings as well all government administrative functions.
• Consortia of two companies with a initial capital of $600 million launched the project. The city is
being housed while some business offices have been set up.
• The city had received Global environment facility grant from the World Bank.
• The project is a testimony of strong political commitment by both the countries, a major draw for
companies from the private sector of the international community to develop.

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When Bail out Demands yes from the government.
• Financial contagion of 2008-09 witnessed a series of bail outs by differ t government of private
or state owned enterprises.
• The burden of these rescue efforts fell on the tax payers and at times its ripples were felt across
the national boundaries as in the case of EU. The US government had to bail out financial
institutions as well as auto industry.
• At times it is needed to stop unemployment and to avoid the spill over effect on other sectors
which are as vulnerable.

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Bail out of TEPCO by the government of Japan?
• Wide spread ramifications of Tsunami in March, 2011, its impact on Fukushima nuclear disaster,
was a catastrophe not only for Japan but also for Tokyo Electric Power Company, TEPCO.
• In the aftermath the company was burdened with a huge clean up bill of $127.8 billion as well as
an estimated compensation of $34.4 billion to 1,60,000 residents who lost their homes.
• Financial and social burdens were to heavy for the company to bear. In 2012,in exchange for a
fresh capital injection of $12.8 billion by the government, the management’s proposal to share
holders to be part nationalised was accepted, making government the official share holder and
held slightly more than 50% voting rights.

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• The fact melt down of its nuclear reactors affected a large number of Japanese made it an issue of
national importance. TEPCO played a key role in providing power to 45 million people in and
around Tokyo, 35% population of the country.
• Without bail out power supply to such a bulk of population would have been jeopardised.
• The bail out also enabled the government to undertake strategic corporate reforms, restructured
power industry which had been monopolised by various regional companies. TEPCO lowered
the access charges for electric transmission lines for independent power retailers( producers and
suppliers).
• Retailers were able to contract out with major clients on competitive rates thereby revitalising the
energy sector.

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When Bail out not a virtue. King fisher Airline grounded.
• KF was ranked as India’s second largest domestic airline in terms of market share, plunged in
ranking due to mounting financial troubles. Contagion effect sucked the government in salvaging
the Indian airline, it was unable to add a private company to its bail out list.
• In 2010, consortium of banks approved an extra ordinary package to the airline, but to experts
KF wasted that money in funding higher losses. With Air India’s debt at $13 billion, the
government could ill afford to add another airline to the list.

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• There were systemic and regulatory issues as well. K F had poor management and operational
strategies. The business model took off as low cost, all economy single class configuration
aircraft, but after an year reconfigured its 14 aircrafts to include the business class seats.
• It acquired another loss making airline so as to qualify for international routes, launching long
and short haul flights in one go. Owing to cash crunch, it failed to pay its service taxes, airport
and income taxes., owed money to employees and leasing firms, oil companies and transport
companies.
• KFs failure to generate profits was partially caused by a brutal price war, set in motion by Air
India.
• Without adequate working capital, a viable business model and competent management KF was
prone to be liability like the Air India.

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Government as Fiscal manager and Regulator.
• In developing economies the government often winds up playing myriad of roles., takes the
fiscal responsibility of raising revenues and assigning various expenditures for the service
delivery and to meet the other desired outcomes. The main task is to balance between revenue
raising and managing expenditures.
• It is the largest consumer of domestically sourced goods and services. It ranges from mundane
paper clips to hefty investments like naval vessels.
• As a promoter of enterprise, it creates an eco system of tax incentives, grants access to cheap
land or plentiful skilled labour so as to nurture businesses.
• It provides capital as well, deploying appropriate fiscal instruments.

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• As a Regulator, it wields substantial influence over the industry structure, desired ownership
profile and degree of competition.
• Regulations facilitate the exercise of multiple levers of control and influence. The government
determines who and how many can play in a particular sector.
• Levers of control take the form of a prescribed share holding cap on foreign interests. Others
include anti trust laws. At international airports a combinations of different restrictions may be
present, the number of operators, limitation on foreign owner ship, tariff regulations.
• Such restrictions may be linked with other areas of public goods, like defence related industries,
financial services, Telecoms. These should be business friendly and protecting the consumer in
the ultimate.

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• Regulations that systematically discriminated against foreign investor with a view to protect the
local player. These include limits on foreign ownership, performance requirements on exports,
technology transfer or local procurement.
• A balanced approach has to be taken to open the country to foreign investors.
• Wall Mart, IKEA, and Carrfour making its way into emerging markets.
• Despite its popularity in many parts of the world, IKEA, for instance, has yet to penetrate the
Indian domestic market. It can be attributed to restriction in ownership in a single brand retail
store. There is foreign ownership CSP.

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• In India the government is now allowing foreign firms to fully own single brand retail stores with
the mandatory condition that 30% of the products shall be of domestic sources.
• This is going to incentivize global retailers to transfer best practices and technology to the
industry. Local sources are supplying goods ranging from textiles to rugs to ceramic for its global
stores..

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THANK
S