Shrinking the deficit

Loss-making State-Owned Enterprises (SOEs) have long been a challenge for fiscal discipline in Sri Lanka, but this is set to worsen with COVID-19. In just the first quarter of 2020, debt-ridden National Carrier SriLankan Airlines (SLA) has incurred a net loss of Rs. 47 billion along with an accumulated loss of Rs. 326 billion. Other large SOEs are also set to struggle, making SOE reforms imperative. 

According to a recent audit report, the company’s current liabilities exceeded its current assets by a jaw-dropping Rs. 211 billion. The company’s current liabilities exceeded its current assets by Rs. 211,645.13 million and total liabilities exceeded its total assets by Rs. 273,369.08 million. 

Considering the poor performance of the company and the mitigating factors presented by the SLA management along with Government support, the Auditor General said he considered the airline was to continue its operations as a “Going Concern” and the financial statements had been prepared based on the ‘going concern’ assumption. 

Prolonged losses by SOEs, partly due to unsound decisions made by policymakers, have resulted in large budget deficits. And despite the need to reform critical SOEs, successive governments have failed to achieve this in a genuine and sustainable manner. In 2020 Sri Lanka’s deficit is estimated to be 10% or higher, creating massive challenges for fiscal sustainability. 

The ‘State of State-Owned Enterprises’ report for 2019, released by think tank Advocata, pointed out that internal control, monitoring and governance frameworks seem inadequate to deal with major problems of SOEs, making restructuring difficult. Of the 400-odd entities, regular information is only available for 55. Even obtaining a complete list of entities proved to be a challenge. Financials are routinely late and only a minority obtain ‘clean’ audit reports. Of the 55, only 11 had published an annual report for 2016 by the time the Department of Public Enterprises compiled its Performance Report for 2017. 

Underperformance appears common; according to the Department of Public Enterprises, the 55 largest delivered a net Return on Assets (ROA) of only 0.64% in 2017. The combined losses among the loss-making entities reached Rs. 87 billion in 2017 compared to Rs. 42 billion in 2016. 

Some are in deep trouble. The Petroleum Corporation carries a negative equity. Sheer incompetence and corruption have pushed SriLankan Airlines close to financial collapse. Central budget support to SOEs amounted to Rs. 41 billion in 2017, and both 2019 and 2020 has not helped matters much. 

The reports of COPE and the Auditor General highlight repeated instances of fraud, mismanagement, corruption and negligence. The issues no longer appear to be isolated incidents of opportunistic behaviour by individuals, or occasional lapses in control, but point to deeper structural weaknesses, which need to be addressed by reforms. 

Despite being a relatively small country, Sri Lanka is estimated to have about 400 SOEs, and addressing their issues piecemeal has proved difficult. Cherry picking the most lucrative SOEs and reforming them may help the budget and fiscal management, but for them to truly meet the demands of public interest, they must also be conducted in as transparent and accountable a manner as possible. The Government should make SOE reforms a policy priority or risk their other growth and fiscal consolidation targets being undermined.