Privatization: The Bahamasair Case

Anyone who lived during World War II can still remember the stark issues faced by mankind. The world was confronted with "Deutchland uber alles", Germany over all. It took five years, tens of millions of lives, enormous expenditures and unbelievable destruction to end this threat to civilization.

Politics "uber alles".

After this great conflict the world was confronted with another reality... politics "uber alles". The Great Depression produced a profound distrust of capitalism and a desire to eliminate the disparities in material welfare. The Great War showed that governments could overcome enormous obstacles. So... it was logical to believe that "government" could cure the perceived ills of capitalism and eliminate suffering. In democratic countries voters demanded it.

For 50 years the world was a giant laboratory for economic policy experimentation. The Russians, behind their new found military power, spread beyond its borders the dream of a new society... a society where human needs were defined and satisfied by the state. The responsibility of the individual to provide for himself ended. Literally... Communism attempted to remake the nature of man. It failed to do so at an unbelievable cost in human lives... greater, in fact, than the direct loss of life caused by World War II.

There were very precise national experiments... East and West Germany, the two Koreas and the three Chinas. The colonies sought both political autonomy and economic salvation.

Tanzania, for instance, under the aegis of President Julius Nyerere developed a unique socialism called "ujamaa". The age-old tendency of Africans to spread out across the countryside ended as poor farmers and herders were forcibly assembled into villages. The government fixed prices and nationalized and expropriated companies. This socialist experiment was lavishly funded... an estimated $20 billion of foreign aid between 1970 and 1994... on a per capita basis the largest amount ever... the equivalent of one new Atlantis-sized investment every 15 months for 24 years. When he relinquished the presidency Julius Nyerere said, "I failed. Let-s admit it."

Today Tanzania remains one of the poorest countries in the world with an annual Gross National Product per capita estimated between $128 and $800.

Economists had a field day. It was the Keynesians versus the neo-classicists. In the end the latter triumphed. Their work on wealth, growth and the factors producing growth were instrumental in turning the intellectual tide... and produced eight Nobel prizes. Eventually the failures of central planning and socialist ideology became apparent. By 1996 even the International Monetary Fund... long supportive of statist solutions... formally recognized the primacy of free markets in solving the world-s economic ills.

Of course "politics uber alles" in non-Communist countries produced government corporations. Mexico, for instance, nationalized 600 companies ranging from telecommunications to kitchen appliance manufacture and even a Mexico City night club... all motivated by job protection. The gross inefficiency and financial cost became intolerable. Privatization of these companies became a key element in the country-s effort to reduce government expenditures.

The Bahamas.

In the Bahamas the "old" PLP government established controls over private enterprise and government ownership of the utilities, radio, TV, hotels, central banking, commercial banking, social security and air transport. It even mounted disastrous forays into cattle and chicken raising. In 1992 the FNM took the first step by selling off the hotels. But it has not moved beyond this... and the Prime Minister in a December 14th two-page newspaper statement publicly took Bahamasair off the market.

This article will deal only with the privatization of Bahamasair and will comment on his statement and the 1994 audited financial report.

Bahamasair.

His statement reviewed the 24-year history of the company... 18 years under the PLP and 6 years under the FNM. The PM pointed out that --

• Prior to 1998 audited financial statements were never presented to Parliament. Statements for the years 1974 to 1986... but excluding 1981 and 1983... were tabled in 1998. There are no audited statements for 1989, 90 and 91 and the auditors are now working on 1995.

  The normal practice in advanced countries is to publish audited financial statements four months after the close of each fiscal year.

• He indicated that the present in-house financial reporting system is "unable to verify receipts, payments, payables, receivables, assets and liabilities."

  Auditors cannot produce "unqualified" statements in these circumstances.

• He stated that in January 1993 the Bahamasair General Manager informed him that the company "is, and has been for some time, bankrupt."

  The auditor-s report for fiscal 1994 was completed in September 1997... three years late. It showed that Bahamasair had an accumulated operating deficit of $162 million and the country-s total investment at risk was $204 million in capital, loan guarantees and short-term credit. The auditors had doubts about the amounts shown for assets, revenues and liabilities... the statements were "qualified." They concluded with a statement that appears totally innocuous. Coopers & Lybrand had "substantial doubt that the Company will be able to continue as a going concern."

  In the world of finance the 1994 audit report by Coopers & Lybrand is as bad as audits get. In business this is the stuff that turns directors and shareholders alike into raging dissidents because they have a financial interest in the company. This is not the case with Bahamasair. The primary focus of its "shareholders" is politics; a bad audit does not light a fire... it is simply explained away.

• The PM stated that the annual operating loss is presently $16 million and he asked for and Parliament approved a $13.7 million government loan guarantee to enable Bahamasair to purchase two Boeing 737s.

  The current financial drain... $29.7 million... is equal to 62% of the fiscal deficit budgeted for 1998/99. The accumulated operating loss may now be as much as $226 million and the total investment at risk $282 million.

  Yes! Bahamasair is still bankrupt... and the accumulated deficit goes on accumulating.

  The PM made the following comments about staffing levels, management and the corporate culture.

• He stated that Bahamasair remains overstaffed because its management did not follow the manpower directives given it.

  This is not the impression of past managers. Except for the period 1992-94 they operated on the assumption... perhaps falsely... that they could not downsize nor retire employees before age 65.

• The PM stated that Bahamasair despite the overstaffing still "lacks adequate, capable management, engineering, marketing and accounting personnel" and has "an established culture of doing things without proper authorization."

  This is a sad commentary on a company that has been in operation for 24 years. However, the fundamental truth is that politics dominates this company-s culture... destroying discipline, financial control and accountability and emasculating customer service and hiring objectives.

  Air safety has been the lone consistent bright spot because, if you want to fly into Miami, pilot proficiency and aircraft maintenance must meet U. S. standards.

Despite all of the above the Prime Minister contends that "Bahamasair is essential to national development... we can-t do without it."

This statement just does not ring true when one remembers the efforts of a group of fearless Bahamian entrepreneurs who in the early 1990s started a new airline... Trinity Air. They believed the country needed a small, efficient, service orientated company very much like Southwest Airlines. They leased beautifully refurbished DC-9s and hired beautifully attired, courteous Bahamian stewardesses and experienced pilots. Like all businesses the organization was not perfect and the equity base was limited to the financial resources of the entrepreneurs.

However, no one anticipated the delays caused by the country-s non-compliance with U.S. regulations. No one anticipated that Bahamasair during Trinity-s critical start-up months would pull some of its Dash 8 turbo-props out of service and replace them with a leased Airbus... a jumbo-jet for the Miami-Nassau route with a foreign crew. The cost of this to the Bahamian taxpayer is reported by one informed source to have been $6.5 million. With its left hand deep in the pocket of the public treasury, Bahamasair squashed Trinity Air with a mighty right hand blow.

Conclusions.

The moral to the story is -

• Bahamasair is the perfect example of what is wrong with public corporations... they operate without market and financial restraints.
• The country can afford the luxury of this government enterprise only by borrowing... by mortgaging the future of its citizens.
• Others can and will supply air transport services more efficiently without such a lien on the present and future income of Bahamians... if only given the opportunity to do so.
• The government needs to assert fiscal responsibility: it needs to balance the budget, stop the growth in Bahamian dollar debt and reduce taxes.
• The Prime Minister should be applauded for his candor in stating his case publicly.
• Nevertheless... he should sell Bahamasair, stop the losses and focus on crime, justice and education.

Like Bahamasair equally compelling cases can be made for Batelco and other utilities including the Post Office.

We must recognize that privatization is neither an easy nor politically comforting policy in the short-run. It means confronting reality and breaking the shackles of "Politics uber alles." If allowed... however... it will create opportunity and sustained growth.