Privatisation – a progressive move

Last week, at an event organised by the Advocata Institute, an expert panel pointed out that privatisation of the State-Owned Enterprises (SOEs) was the need of the hour as the cumulative losses of 55 State entities amounted to a massive Rs. 1.5 trillion over a period of 15 years, representing the enormous burden people have borne due to the deficiencies of the SOEs. Privatisation in Sri Lanka was declared a State policy for the first time during the 1987 Budget Speech. Nevertheless, the transfer of ownership in public enterprises to the private sector only began to take off with the commencement of Late Ranasinghe Premadasa’s presidency. Despite its Leftist inclinations, under President Kumaratunga’s administration (from 1994 to 2001), the policy of privatisation was given a significant impetus with the establishment of the Public Enterprises Reforms Commission (PERC) in 1996.

The subsequent Wickremesinghe-led Government too continued the same set of policies. However, privatisation disappeared as a policy mechanism with the arrival of the JVP-inspired UPFA Government in 2004.

The assumption of power by the Rajapaksa family in 2005 brought about a 360-degree turn with regard to the State policy on public enterprises, whereby not only the divestiture of State entities was abandoned, but even the hitherto privatised companies – like SriLankan Airlines and Shell Gas (predecessor to Litro Gas) – were brought back to the Government ownership.

The fundamental issue with the SOEs is that there is no sense of ownership unlike in privately owned businesses. Further, in addition to the inherent agency conflict – which is observed in entities that are managed by individuals who are hired by the ownership – the SOEs are further weakened by the interference emanating from politicians. Some of the large-scale State enterprises – e.g. CEB, CPC, and SriLankan Airlines – exist solely for the financial enrichment of their employees with no intention whatsoever to provide rewards to the ostensible owners – the general public. 

Last year, both CPC and SriLankan Airlines paid bonuses to employees despite incurring losses and as a result, their chairpersons were asked to submit explanations by President Wickremesinghe. Deplorably, the most unfavourable aspect of the SOEs is that the losses of the enterprises have to be borne by the masses involuntarily through higher taxes, and in Sri Lanka’s case via indirect taxes that disproportionately burden the poor.

Although, the SOEs are supposed to be owned by the general public, the empirical evidence confirms that it is a small group of people connected to the ruling Government who benefit from the State having ownership in these entities. In fact, the persistent objection of the Rajapaksas towards privatisation was driven by their desire to appoint their kith and kin to the leadership positions of the SOEs in order to wield power. The appointment of a brother-in-law of Mahinda Rajapaksa as Chairman of SriLankan Airlines ensured that it functioned like the airline of the Rajapaksa clan.

Sri Lanka’s experience with privatisation had produced numerous success stories, while there had been some instances of controversy too. The divestments of public enterprises in the past enabled the Treasury to realise fiscal benefits in addition to attracting the much needed foreign investments from reputed multinationals. The acquisition of Lanka Lubricants Ltd. (now recognised as Chevron Lubricants Lanka) by the US-based, multinational energy giant – Caltex International (currently known as Chevron Corporation) in 1994 is one of those success stories. Today, it is the leader in the lubricant market, and one of the highest dividend-paying listed firms.

Privatisation is opposed by rent-seeking groups like trade unions who cannot continue with their merry ways under a more dynamic ownership framework. President Wickremesinghe has astutely brought back the concept of privatisation to the domain of policymaking after almost two decades, and already transaction advisors have been selected to divest few SOEs. It is the duty of the public to support such progressive moves instead of obstructing as they had done in the past.