Administrative expropriation in practice: How regulators can ruin the investment climate

Posted on January 11, 2010  /  1 Comments

One of the key concepts we use when teaching about regulation is administrative expropriation. It is a form of expropriation that is distinguished from the more obvious expropriations by governments (nationalization) or warlords. It nibbles away at the ability to make the expected return on investment and beyond a certain point starts to eat into the invested capital itself.

In my teaching I define it as follows:

Administrative expropriation = being prevented from making a reasonable return on investment per expectation at point of investing, usually through a series of actions (not decisive when each taken alone), resulting in de facto expropriation of the investment
Not necessarily telecom specific; can be through tax laws, customs authorities, etc.
Any government can engage in admin expropriation, directly or through proxies

The Sunday Leader lead story of 10 January 2010 provides an excellent example of administrative expropriation by a regulator, violating the provisions of the enabling law at the behest of a political authority or in an attempt to curry favor with a political authority. While the actual amount may be miniscule in relation to what the telecom operators make in a year, the signal is deadly to the perceptions that constitute the investment climate. It tells future investors that the regulatory agency is no longer a shield against administrative expropriation, as the law intended, but is now an active instrument of expropriation. This increases regulatory risk; which in turn increases the cost of capital and/or skews investments to the short-term hit-and-run variety. The losers are the people and the economy in the long term.

The news story, co-authored by a legal scholar is worth a full read, though the tax figures may need some work.

In a blatant display of despotism, President Mahinda Rajapaksa instructed the Telecommunications Regulatory Commission of Sri Lanka (TRC) to order mobile phone operators in the country to send a New Year Greeting on January 1st to a massive 13.5 million phone users free of charge on his behalf.
TRC, a public institution established and governed by law, run with public tax revenue had absolutely no power to issue instructions to mobile companies to promote an election candidate.
In fact, Sections 4 and 5 of the Sri Lanka Telecommunications Act No. 25 of 1991 as amended by Sections 7 and 8 of the Sri Lanka Telecommunications (Amendment) Act No. 27 of 1996 does not empower the TRC to issue instructions to companies to promote candidates.

Sri Lanka’s investment climate for telecom is already poor. And we are not the only people saying so. The only silver lining is that public-interest advocates and the media have not allowed this illegal act to be buried. Just getting rid of the person who acted ultra vires will not be enough; looks like a new act will be needed. But more than that we will need to build a culture of Constitutionalism.

1 Comment

  1. A media story that develops the argument: