Sri Lanka’s expropriation bill as BATNA

Nov 06, 2011 (LBO) – The government is paying a price for advancing a bill to expropriate private enterprises at a time when it wants to attract more foreign investment and to induce domestic investors to commit more resources to productive economic activities.

In addition to the negative signals sent by the Bill itself, the government now has to deal with the implications of Zimbabwe-like occupations, as seen at Sevanagala.

Unintended consequences

When the government moves to expropriate private property, bad signals go out. The reasons may be justified, but the very intention of using state power to deprive legitimate owners of their property encourages and activates the worst elements. Those governed by the dictum of “Rusiyavata vadiya lokuyi Irisiyava” come out of the woodwork, as they have already done in Sevenagala. Those who cannot build their own wealth but want to partake of the fruits of the efforts of others start manipulating the government. Government loses control of the process. Unintended consequences follow.

Hotel de Buhari in Panchikawatte is testimony. When the then government enacted the Business Undertakings (Acquisition) Act, No. 35 of 1971, it is unlikely that they had any intention of running a biryani restaurant as a Government Owned Business Undertaking. But they had to. Why? Because the trade union that was in a fight with the owner, used political muscle to compel the government to acquire Colombo’s then best biryani restaurant.
Back in the 1970s, it took some time for unintended consequences to kick in. The process has already started in the present case, with a Zimbabwe like scenario unfolding in Sevanagala.

Whatever assurances are given, there will be negative effects on investor perception. It will be difficult to avoid damage to the objective of achieving a level of investment in the range of USD one billion per annum.

The BATNA option

Is there a way to limit the damage, or even to make this fiasco a plus point for the large objectives? The President’s assurances to the Chambers indicate a possibility.

It has been stated that the government will request the current owners to submit proposals on how to revive the enterprises or make better use of the assets, AFTER their enterprises and assets have been acquired. Why not switch the sequence? Suspend enactment of the Bill, but announce that it will be enacted within twelve months, AFTER a fast-track mediation/negotiation, ideally with the help of expert facilitators, and only for enterprises and assets where a satisfactory resolution cannot be reached.

This would, in effect, convert the Bill into a BATNA [Best Alternative to a Negotiated Settlement]. It is a reasonable solution to the government’s problem of unlocking assets such as Chalmer’s Granary in the middle of the city without years of litigation. It is a solution, albeit not perfect, to the problems faced by private owners who had invested in good faith and are now facing expropriation with a vague promise of being heard after the fact and while in the midst of making their case to the Compensation Tribunal. It offers a respectable exit path for those who are sitting on assets that are neither serving them, nor the public interest.

Most of all, it is a solution to the perception problem that will affect all of us and the government: if investment slows down it is not only the government’s target of doubling per-capita income that will be missed; our dreams of a better life in a middle-income country will be shattered too.

Is there precedent? Yes. The government suspended the Local Government elections legislation when it was pointed out in Parliament that passing it at that point would have negative results. The government did the right thing then. It should do the right thing, for itself, and for the country, now. Suspend the Bill; initiate facilitated negotiation with the affected parties forthwith.

The biggest win

This will create positive perceptions. If anyone asks whether Sri Lanka is a democracy or if it respects property rights, it will be possible to point to the suspension of the Underperforming Enterprises Bill.

The government had a problem with underutilized assets, but at crunch time, it chose the path of negotiation and eschewed expropriation.

Rohan Samarajiva heads LirneAsia, a regional think tank. He was also a former telecoms regulator in Sri Lanka. To read previous columns go to LBOs main navigation panel and click on the ‘Choices’ category.