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Managing public assets: Why the Temasek solution won’t work now in Sri Lanka

Thursday, 29 January 2015 00:00 -     - {{hitsCtrl.values.hits}}

Last week, I wrote a quick column hoping to limit the damage being caused by hurried, opaque appointments being made at the senior levels of Government-owned organisations. My stop-gap solution was to ask the Ministers of the transitional Government to desist from making appointments other than to the Boards of Government-owned companies and corporations. Leave it to the boards to make the executive appointments and hold the boards accountable for the performance of the organisations, I said. But the efficacy of that solution depends on the quality and professionalism of those appointed to the boards and the ability to hold those boards accountable. If anything has been demonstrated since the proliferation of Government-owned commercial undertakings starting in the late 1950s, it is that our governments use these positions mostly to reward relatives and political supporters; it is that they are not accountable.    

The Temasek solution

Singapore is a country that projects an image of private-sector driven economic development, but in actual fact has an extraordinary amount of Government ownership. For example, the Government owns 56.26% of Singapore Airlines, one of the world’s best airlines. It owns 52% of SingTel and 54% of SMRT, the entity that controls much of Singapore’s internal transport. It does not directly own and control these entities, but does so through a Sovereign Wealth Fund (SWF) called Temasek Holdings. So it is reasonable that anyone looking for solutions to the problems of Sri Lanka’s mismanaged Government-owned commercial organisations should look to Singapore. But it is not reasonable to promote a solution that will not work in Sri Lanka, as has been done in the Maithripala Sirisena manifesto drawing from the position paper of Ven. Athuraliye Rathana’s Pivithuru Hetak organisation. Temasek owns certain Government units that can be treated as normal business enterprises (not those that have other objectives such as the provision of housing or welfare) and can be subject to normal regulatory oversight. For example, the largest fine imposed on a telecom operator by the Government was imposed on SingTel last year. The companies make commercial decisions and do not supply services below cost. Professionals whose only mandate is to run the companies efficiently and produce adequate profits for the owner, Temasek Holdings, are appointed to the Boards. Depending on how they do on the defined performance indicators, they hold their positions. The assistance they provided to the ruling party or who they are related to by blood or which school they attended are not criteria for selection. Anyone who has actually run a company will ask how the performance indicators are set. No one can be asked to produce ever increasing amounts of profit, especially under competitive conditions. Without doubt, the ups and downs of the economy as a whole will also impact return on investment, especially in a highly globalised economy like that of Singapore’s. The solution is to list the companies on the stock market. So the performance of the Board members of companies such as Singapore Airlines that face competition are judged by metrics that include share price. If the holding company determines that the investment is yielding inadequate returns, it can sell down its stake, in addition to getting rid of the directors. But how is the performance of the directors of Temasek Holdings assessed? They are the final decision makers regarding how much equity is held in the various Government-owned companies (they also hold equity in other companies such as Standard and Chartered (18%) and Bharti Airtel (3%). What is their accountability with regard to the investments and appointment and oversight of the directors? Temasek performance is judged in relation to benchmarks connected to the performance of its companies. Yet, one cannot have purely objective criteria. However, well the company is managed, there will be years when it will perform badly. That is just the way it is when one invests money. In any democracy, sovereign wealth funds will come under pressure when times are tough. For that, you have the final safeguard. Since 2002, Temasek’s CEO has been Ho Ching, who just happens to be the spouse of Lee Hsien Loong, the current Prime Minister and a member of the first family. It also has a strong and empowered Board that includes several truly independent directors, including the former head of the World Bank.  

Can this model be transferred to Sri Lanka?

Is the Government willing to list a majority of the commercial organisations it owns in the stock market? Is it willing to allow the Sovereign Wealth Fund (SWF) to divest or acquire shares in the market as needed? Without that there will be no way to set performance standards. Is the Government willing to establish independent regulatory authorities that will treat the SWF-owned companies no differently from those that they compete against? Is the Government willing to let the SWF-owned companies to set their own prices and make their own procurement decisions (paying for any social objectives through competitively neutral subsidies from the Consolidated Fund)? Temasek has been in existence since 1974 and can draw from a pool of excellent former government officials. It is well known that Singapore has some of the best trained and efficient Government officials. Where will the Sri Lankan SWF draw its efficient and incorruptible officials from? And even if they are honest and efficient, will they survive the first downturn in returns or the next political change? Temasek is not a solution that is appropriate for a country where the basic government does not work well. What happens when the model is transferred without the necessary pre-conditions being present can been in the case of Druk Holdings in Bhutan, now seen as a failure.  

No alternative but to privatise

Given the patronage culture ingrained in the DNA of the Sri Lankan body politic, there is no alternative but to work on two parallel tracks to prevent the pillaging of Government-owned commercial organisations. First, and most urgent, is that we must reduce the scale of the problem, by privatising the “monsters” that keep destroying the people’s equity. There is no reason, for example, for the Government of Sri Lanka to operate airlines. When SriLankan was partially privatised and managed by Emirates it contributed to Treasury. After it was “renationalised,” it (and Mihin) became the biggest drains on the Treasury. The second is that we must create the conditions necessary for the success of a Temasek-type solution by gradually listing commercial entities owned by government and strengthening the regulatory mechanisms in letter and in spirit. If instead, we hurriedly transplant an inappropriate model, we will only add to the mess. In the interim, we can open up the appointment procedures for the boards, solicit applications instead of solely relying on the old boy networks, enter into performance contracts with them, and begin to create a culture of accountability.

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