Pitfalls of reviving State sector enterprises

The current administration’s recent push to revive struggling state-owned enterprises (SOEs) presents an opportunity for a closer examination of past experiences and the broader implications of such endeavours. Recent efforts of reviving the Valachanai and Embilipitiya paper factories and the Hingurana sugar factory appear at first glance to be progressive—tackling unemployment, revitalising industry, and fostering economic growth. However, a deeper look into history raises concerns about the long-term sustainability and broader consequences of such State interventions.

While it is understandable for any Government to seek ways to retool ailing industries, the history of SOEs in Sri Lanka reveals a troubling pattern: short-term gains, followed by long-term losses. A Government entity that guarantees risks and pays employees using taxpayer money may seem profitable on paper, but it distorts the true nature of a healthy economy. Profitability in such cases is often illusory, since it is underwritten by public funds and not driven by efficiency or market dynamics. The now abandoned Mihin Lanka, a vanity project of the Mahinda Rajapaksa administration stands as a case in point. On paper the airline was profitable, chartering flights to the then president for his numerous overseas trips, digging into flight routes of the national carrier and its debt being guaranteed by the Treasury. But the overall loss to the State was enormous, eventually shutting down the airline at great cost to the State and taxpayers.

The crux of the problem is that Government-run enterprises are not held to the same competitive standards as private businesses. Without the need to compete in the open market or respond to consumer demand, State-run entities can operate with limited accountability and without the pressure to innovate. They become bloated with inefficiencies, perpetuating a cycle of dependency on taxpayer bailouts rather than striving for self-sufficiency. This inevitably stifles competition in the private sector, where businesses that do operate under market pressures are left at a disadvantage.

Furthermore, reviving these enterprises in the public sector may inadvertently hinder employment in the broader economy. The State, as a major employer, can crowd out the private sector by absorbing a disproportionate share of the labour force, leaving less room for the emergence of new businesses and industries. This leads to a skewed labour market, where the majority of jobs are concentrated in inefficient and uncompetitive Government-run entities rather than in dynamic, growth-driven private sector ventures.

The current administration, despite its socialist leanings, must recognise that State ownership of enterprises in sectors like paper manufacturing and sugar production is neither the solution to employment woes nor the key to economic growth. The State should not act as a businessman, but rather as an enabler of the private sector. By fostering a regulatory environment that encourages innovation, competition, and entrepreneurship, the Government can create the conditions for sustainable growth, job creation, and a diversified economy.

It is time for the Government to abandon the illusion that State-run enterprises are the answer to Sri Lanka’s economic challenges. The real path to prosperity is through a thriving private sector—one where competition, innovation, and market forces are the engines of growth. Only then can Sri Lanka create a truly sustainable and dynamic economy for future generations.