24 Nov 2017

In August 2017, the Singapore government announced that it would double its annual spending in the preschool sector within five years to ensure that every child gets a good start in life. By opening more of the state-run kindergartens and childcare centres, it believes that it can influence and raise the quality of the entire sector.

From stepping in to guide essential sectors and correct market failure, to bailing out national icons that are too big to fail and taking charge of international, politically-sensitive projects, governments have a crucial role to play in the private sector, says Mrs Lim Hwee Hua, a former minister in the Singapore government.

Now a distinguished visiting fellow at the Lee Kuan Yew School of Public Policy, she gave a lecture to its students, titled What Business Does Government Have To Do In Business?, at the School in October 2017.

Why government should be in business

Traditionally, governments regulate and sometimes themselves provide essential services such as transportation and utilities. For strategic and security purposes, their deeper involvement is also necessary in some industries, including the military and defence sectors.

In September 2017, the British government agency Transport for London decided to bar ride-hailing firm Uber from operating in the city, citing four areas of concern, including how the firm checks and approves its drivers and its use of software to evade regulatory bodies.

In some cases, governments may also set up state-owned companies, known as state-owned enterprises, to protect national interests or for public policy reasons. Both impetuses were at play in the Singapore government's recent decision to create a wholly-owned firm to oversee the country's section of the Kuala Lumpur-Singapore High Speed Rail project.

Governments also have an interest in nurturing domestic firms and helping them become regional or even global leaders. A successful firm not only boosts its country's economy but also occasionally acts as a form of soft power for the nation, as evidenced by China's Alibaba e-commerce behemoth.

From time to time, governments may also need to bail out too-big-to-fail companies or national icons to prevent catastrophic systemic outcomes. In 2008, the US government saved two of the country's largest automakers, Chrysler and General Motors, from financial ruin to prevent widespread job losses and the potential collapse of the entire American auto industry.

More recently, two state-run banks in South Korea unveiled a $2.9 trillion won rescue package for the cash-strapped Daewoo Shipbuilding and Marine Engineering to forestall its demise. The company is the world's largest shipbuilder and a national icon.

Three guidelines to follow

Still, governments that venture into the private sector should abide by three principles: be clear about the different roles that they play; be disciplined about exiting when goals for participation are fulfilled; and do not bring politics into the mix.

Governments may see a need to intervene because there's market failure - nobody else can or wants to do a particular job, but then they tend to remain in the sector indefinitely and overstay their usefulness. Knowing when and how to exit the sector is as important as, if not more important than, knowing when to intervene, Lim notes.

When it comes to state-owned enterprises, once a government can exercise its desired amount of influence through regulations, and there are no more strategic roles to be performed, it should seriously consider privatising the companies and getting out of the sector, she advises.

The ability to address any potential conflict of policy interests is also key. Such is the challenge confronting China's State-owned Assets Supervision and Administration Commission (SASAC) which manages the country's state-owned enterprises. SASAC was trying to pay market wages to the senior management of SOEs, and then it had to pause those efforts as part of the national anti-corruption drive, says Lim.

In general, when governments use their state enterprises for political ends or boost their own popularity, such as handing out subsidies, commercial accountability becomes an issue.

In the same vein, governments should avoid giving in to short-term populist demands that may hurt the country in the long run.

Lim notes: Rules dictating the employment of nationals, which is a sort of protectionism, and the imposition of anti-foreigner housing measures are becoming more common. These are sometimes borne out of populist arguments rather than pure policy considerations.

Adapt and succeed

A government that decides to intervene in the private sector must be adaptable and non-doctrinaire in its approach. Lim explains: A government has at its disposal many levers of change and influence. It need not always be a shareholder in order to exercise control over a sector or industry. The need to adapt to the situation is extremely important.

She emphasises: Still, it is the government's business to be in business. It must decide which roles it will play and how it discharges those roles, and, if it is providing capital, it must know when to remove itself from the marketplace, but it cannot absolve itself of the responsibility of being in business.

This piece was written by Feng Zengkun.