HILL
NATIONAL INVESTMENT Bank of Jamaica chairman Aubyn Hill says government faces moral hazard when it is felt that it will not allow an entity to fail or be closed.
Wholly-owned by the Government of Jamaica, the NIBJ aims to foster national economic growth by being a wise investor in economic sectors in which private investors may, initially, be reluctant to invest. But he said caution needs to be exercised to avoid any implied unequivocal insurance against the risk of failure in these enterprises.
"I contend that as long as the Government has even one share in a privatised company it shoulders moral hazard - especially if the other shareholders are Jamaican, the company employs a lot of people or is seen as a national champion," he said. Mr. Hill was addressing the Rotary Club of Kingston last week at the Jamaica Pegasus Hotel.
"When the entity being privatised is very large, it is foolish to sell it to a fledgling or undercapitalised buyer," he said. "The undercapitalised (usually local) buyer will have no choice but to leave it in the lap of the Government when the first set of problems arise."
To avoid moral hazard on small and medium-sized deals, buyers must be well capitalised and experienced to handle the privatised entity in perpetuity, Mr. Hill stated. "For large privatisation deals, the buyer - local or foreign - must have deep and sustainably deep pockets, plus rich and broad experience and a lot of reputation to lose. The recent bauxite deal with Alcoa which put the foreign Alcoa in the majority shareholding position is the right model and a good example."
