Public assets: The development gateway for Sri Lanka

President Ranil Wickremesinghe

Treasury Secretary Mahinda Siriwardena

Given the size of the state-owned sector and its presence in a range of competitive and commercial sectors, private investment would be limited unless the Government can demonstrate that its portfolio of assets is no longer a conduit for corruption. International private sector investors will also be looking for evidence that the portfolio is operating on a strictly commercial basis and not encumbered by any policy agenda, unfair advantage, or market distortion. Properly restructuring the management of public assets is, therefore, the gateway to investment in the country as a whole and its future development as a sustainable market economy

For the development of Sri Lanka, the Government must fully explore and exploit all potential sources of funding and all methods of embedding a thoroughly market-driven economy, thus improving the private investment climate. Sri Lanka has a large state-owned sector, making effective management of state-owned assets essential.

Properly managed, Sri Lanka’s public assets would provide a material funding source. Public assets is the largest wealth segment in the country. The aggregate value of public assets could be close to US$300 billion. A sustained annual revenue stream of some US$4 billion could be achievable with proper management. 

State-owned enterprises such as, (those within energy, transport, and finance) and real estate would be a critical part of economic restructuring and recovery. The sector is a cornerstone of Sri Lanka’s current economic and political system, both, in terms of its size and importance to the economy (including the well-known problems of inefficiency, corruption, and fraud). Effective management of state commercial assets would therefore have a transformative effect on how business is done in the country. It would increase competition, productivity, and efficiency and drive the adoption of business practices aligned with best practices, including in relation to transparency and accountability.

Economic recovery and growth will also depend on foreign investment flows from the private sector, in turn, reliant on a transparent, level playing field that is not dominated by state-owned companies pursuing political goals. Given the size of the state-owned sector and its presence in a range of competitive and commercial sectors, private investment would be limited unless the Government can demonstrate that its portfolio of assets is no longer a conduit for corruption.  International private sector investors will also be looking for evidence that the portfolio is operating on a strictly commercial basis and not encumbered by any policy agenda, unfair advantage, or market distortion. Properly restructuring the management of public assets is, therefore, the gateway to investment in the country as a whole and its future development as a sustainable market economy.

Improving the portfolio's value through professional asset management would improve debt sustainability.  International research has shown that countries with stronger net worth (assets minus liabilities) recover faster from recessions and have lower borrowing costs. ,  

Recommendations

Value maximisation – single objective

Improving the performance of public commercial assets requires the process to be framed in financial terms, with well-defined financial targets and a clear timetable. This is more effective than framing it as a corporate governance reform.

Holding company – as Public Wealth Fund

Consolidating the ownership and governance of the entire portfolio into an independent holding company at arm’s-length from short-term political influence, typically called a Public Wealth Fund (PWF). This centralisation makes it possible to introduce private sector discipline, with clear responsibility and accountability delegated and defined ‘as if privately owned’. 

Ministry of Finance – sole responsible and accountable custodian

Managing public commercial assets must be separate from policymaking and be at arm’s length from the regulatory role of line ministries. The experience in several countries has shown that the commercial and political risks associated with such ownership make the Prime Minister’s/President’s Office unsuitable for the custodian role, as this could risk the survival of the entire government.  Improving net worth and ensuring efficient capital allocation in the public financial management system is within the domain of the Ministry of Finance, which is why it is logical for it to be accountable for the development of the portfolio. 

Capital markets – the ultimate disciplinarian

It would be paramount to engage as many international stakeholders as possible through the capital markets, primarily by issuing bonds for the holding company and the larger holdings. Subsequently, list the larger and more attractive holdings and possibly the holding company. This could potentially be done through a ‘dual listing’. 

Introducing professional ownership

Managing public commercial assets must be separate from policymaking and be at arm’s length from the regulatory role of line ministries. The experience in several countries has shown that the commercial and political risks associated with such ownership make the Prime Minister’s/President’s Office unsuitable for the custodian role, as this could risk the survival of the entire government. Improving net worth and ensuring efficient capital allocation in the public financial management system is within the domain of the Ministry of Finance, which is why it is logical for it to be accountable for the development of the portfolio

General principles

More efficient and higher-yielding public commercial assets require that these assets are managed by professional managers tasked with achieving commercial goals rather than politicians or public servants who inevitably must serve political goals. 

Any compromise in the fundamental pillars of good governance for public commercial assets, including transparency, a clear objective and political insulation, would be translated into lower returns for the portfolio and the individual assets. Hence, the existence of an almost perfect correlation between the level of private sector discipline and yield. 

Separating policy and commercial objectives is fundamental

Creating a level playing field with the private sector would involve separating the dual responsibility often associated with public assets by financing the provision of public service obligations or subsidised tariffs separately and giving any subsidies directly to the individuals that need them, instead of via any government company. This would allow government-owned companies to be fully commercial on the same conditions as a privately owned competitor and therefore, require them to perform at the same level as any private sector competitor. 

To increase the supply of public housing requires a separation between the demand and the supply side of building the housing stock. Production can then be done on a commercial basis by private or publicly owned companies alike and on the same terms.  

Capital allocation in the financial sector would improve if the ownership and governance between state-owned banks and government-owned companies were separate. The largest government-owned companies could then be made to source some of their funding from non-bank lenders. This would help develop Sri Lanka’s thin capital markets and oblige the banks to turn to private companies, SMEs, and consumers instead. It would also create additional stakeholders and break the traditional bilateral relationship between state-owned banks and companies. 

Developing the economy is a political choice

Professional management of public commercial assets is not ‘rocket science’. It is done with great results in the private sector every day. The challenge is entirely political. What is required is the political will to introduce private sector discipline as a concerted effort backed by the entire Government.

Sri Lanka needs to use all of the opportunities available to generate revenues for the Government and create conditions for private sector investment that lead to economic growth. The breadth and depth of state-owned assets in Sri Lanka mean that the portfolio and its efficient management is essential to the recovery. If well-managed, they present major opportunities for state finances, investment, and economic development. If not, they would present structural obstacles that would put  swift recovery at serious risk. Accordingly, rigorous, professional, and commercial management of public assets is of essence for Sri Lanka’s growth and prosperity.

(The writer is the principal of Detter & Co, an advisor to governments, investors and IFIs such as the IMF, World Bank and the Asian Development Bank. He led the restructuring of the Swedish portfolio of state-owned assets and is the author of ‘The Public Wealth of Nations’.