Between irrelevance and irresponsibility

 The Forbes news piece brought to light for the first time DHI’s covert investment of millions of dollars of public money in the volatile crypto empire which went bust last year. The strange thing about this investment is that the DHI tried to keep all of it clandestine and remain interestingly comfortable after having gambled away millions.  

What is particularly frustrating is, besides wanton disregard for the well-known risks inherent to the volatile crypto market, the company allowed the flow of the scarce dollars when it was sorely needed back in the currency-deficit country grappling with covid19 woes. 

The DHI and its mandate

The Druk Holding and Investments (dhi)  is a government-owned holding company formed in 2007 via a royal charter "to hold and manage the existing and future investments of the Royal Government of Bhutan for the long-term benefit of the people of Bhutan". It holds shares in manufacturing, energy, natural resources, finance, communication, aviation, trading, and real estate companies. These companies are of three types: DHI-held (100% share), DHI-controlled (>51% share), and DHI-linked (<51% share).

As a holding company for the state, DHI has several important mandates (see here) of which three below are of relevance to this discussion.

• Maximize return on investments by optimal utilization of resources.
• Lead, complement and spearhead the growth of a dynamic private sector.
• Make investments outside Bhutan

Since its inception, the company has taken over several large public ventures that account for a large percentage of the gross domestic product (GDP), and it regulates them through an autonomous governance structure comprising the Chairperson appointed by His Majesty the King, a board of directors, and a Chief Executive Officer appointed by the board of directors. Having this control over eclectic economic sectors in the country, DHI is also a major employer of talent and recruits qualified and highly skilled Bhutanese technocrats and professionals. The salaries, bonuses, and other benefits the company offers are more attractive than those in the civil or private sectors in Bhutan. This is reflected in the disproportionately higher ratio of foreign-educated, technically qualified Bhutanese talent pool being employed in the DHI companies compared to its lacklustre counterparts, the civil service and the private sector.

Recognising the talent pool in the company, the DHI has been entrusted to spearhead several important national undertakings. For example, DHI finalised the National Digital Identity platform in February 2023 and it was launched by the crown prince, who became the first Bhutanese digital citizen. The NDI is sort of a digital wallet where a citizen would have access to their civil identity and a host of personal data in a digital account accessible to individuals. This move would be the initial step towards the much-talked-about digital transformation in the country.

DHI’s pandemic-time performance

DHI's 2021 annual report shows the company had a remarkable 16% growth rebound in the financial year 2021 compared to a 12% revenue decline in the financial year 2020. The company remitted Nu. 13,032.86 million as dividends, taxes, and royalties to the Royal Government of Bhutan in the financial year 2021. Holding power, telecommunication, finance, and trading companies, DHI saw less COVID-related disruption to their revenue flows compared to the private sector’s complete nosedive.

In the same report, DHI also reported a significant investment abroad in 2021. The investment in cryptocurrency related to the recent Forbes report could be one such investment by the DHI but no mention of it is available in the report. If crypto investments were made in 2021, it is curious why the omission was made. Surely, it would have shown DHI's creativity as well as proved the company is abreast of the rest in the digital zeitgeist. They chose not to disclose it, but Forbes let the cat out of the bag. 

The Forbes news report

The DHI was reportedly a customer of now-bankrupt crypto lenders BlockFi and Celsius. The company had kept this side of the investment secret from the Bhutanese people, whose wealth the company supposedly safeguards, even after the crypto world went bust last year. According to the Forbes article, DHI had borrowed from BlockFi some 30-odd million coins (pegged 1:1 USD) and the lender had alleged that the company "failed and refused" to make a full loan repayment, leaving an unpaid balance of USD 820,000.

The article quotes the DHI Chief Executive Officer as saying “We do not have any comments as the matter with BlockFi has been settled. We are not able to comment due to confidentiality.” This statement is inadequate in explaining the reports because it gives no picture at all of what "settled" means. How was the loan repaid? Who paid for it?

The amount is eye-watering for a country whose forex is quickly emptying, forcing the government to place a moratorium on the import of vehicles and non-essential cloth and food items. Equally, even more, troubling is the term "confidentiality". It shows how the company can make dealings in the unholy backstreet of the crypto world where young, testosterone-charged kids with superhuman IQs emerge and vanish like gnats in tropical heat in summer. 

However, if the investments were made in 2022, the annual reports aren't out yet. But that does not mean the company will mention this investment in the reports. The CEO's refusal to comment "due to confidentiality" hints the reports will omit this investment. This leads to further confusion; on the one hand, the company does make mention of investments it makes in more conventional ventures. So, why should one investment be kept confidential while others are not? Perhaps this is DHI’s way to curtail criticism of risky investments. And curiously, it appears DHI is not legally obliged to make public its investment, much less the poor investment that becomes a liability and might embarrass Bhutan internationally.

Such freedom to make investments with no checks can engender financial wantonness and corruption.  State-owned companies (SOEs) are quite popular for business ineffectiveness, corruption, and crowding out of potential private sectors. Thus, for DHI to make covert investments in volatile ventures means the company could drag the country to financial disasters way larger and more damning than the crypto fiasco reported in the Forbes article.

The crypto fiasco is especially telling if we look at it against two of DHI’s mandates:

1. Maximize return on investments by optimal utilization of resources.
2. Lead, complement and spearhead the growth of a dynamic private sector.

The investment in crypto didn’t seem to maximize RoI. It wasn’t by any standard an “optimal utilisation of resources” because when the investments were made the country was economically at its knees and didn’t appear it would get up anytime soon. Financial poverty was already pulling people down the poverty line in remote parts of Bhutan, as indeed in the urban centres where inflation was soaring. So, millions of dollars were dumped in dubious ventures when the country sorely needed it at home. And, the priority certainly should have been domestic need because DHI's wealth, at least on paper, is people’s wealth and they should have had the access to it through local investment and boost-ups to ease some of the COVID-19 pain. In other words, this investment isn't justified even if we looked at it through the intention rather than the outcome, something Milton Friedman would have scoffed at.

It is also important that we objectively looked at how well DHI is fulfilling its mandate to "spearhead the growth of a dynamic private sector”.  The DHI companies are expected to avoid competition with the private sector by focusing on ventures with longer gestation periods and strategic investments while divesting shares in companies which can be operated more effectively by the private sector. But this was not to be. According to the World Bank, between 2009 and 2015, DHI's assets grew from Nu 51 billion to Nu 154 billion, a threefold growth. Meanwhile, DHI was actively deterring private investments in small-scale mining, woodcraft, and construction, sectors with higher profitability, through its own investment creating unfair price competition. 

 The flip side isn't exciting either. SOEs, either DHI-held or otherwise, have not made significant profits in their business. And the DHI executives justify the less-than-flattering performance of the companies saying: Public sector companies suffer as a result of competition from the private sector.  According to the Natural Resouces and Environment Committee of the National Council, in June 2021, the profit and employment trends in SoEs were decreasing while the subsidies to the SOEs were increasing. In November 2022, National Assembly's Economic and Finance Committee reported similarly poor performance of SoEs. The profit for the Nu. 1.5 billion injected in SoEs in 2020 was well below the principal amount injected. This clearly shows SoEs can be a liability to the state, besides inhibiting private sector growth. Almost five years after the World Bank's recommendations were out suggesting that the SoEs, including DHI, must not compete with the private sector when the sector can deliver more effectively, the ground realities haven't changed much. The same report by the Economic and Finance Committee of the National Assembly says certain SoE is importing dairy products from India and crowding out poultry production by Bhutanese farmers. 

Besides being economically disadvantageous for the country, DHI and SoEs taking up ventures that the private sector can profitably operate contravenes the Public Finance Act (2007) which requires SoEs to undertake commercial activities that the private sector may not be able to cater to due to critical resource constraints.  

So considering the recent clandestine crypto investment that has busted, the poor economic performance of the DHI and other SoEs, which at best are associated with jobless growth, and crowding out of and unhealthy competition with the private sector, the time has come to objectively and frankly assess the relevance of DHI and SOEs in their current sizes and shapes. 

The natural corollary to the above realities, I believe, would be this question: should the DHI not be more properly regulated, made more transparent, and restrained from causing economic stampede? What risks does alternative power with unrestrained modus operandi in business pose to good governance in the country?