SOE sales to SOS

In discussions of the current context and issue, Sri Lankan political culture takes a back seat to blame being put on specific individuals or parties. The culture deserves as much mention as it has contributed to the country’s economic decline, even without the current crisis. 

For decades, Sri Lankan political leaders have ridden to power on populist promises such as subsidised rice, low-cost bread, public sector salary rises, free fertiliser, and tax cuts. As a result, the economy has become unsustainable. Sri Lanka’s populist policies have resulted in the establishment of numerous State-owned firms, many of which are losing money. 

Sri Lanka has 527 State-Owned Enterprises (SOEs), with 55 deemed strategically important. In general, SOEs in Sri Lanka are structured in such a way that they will fail. There are no budgetary constraints, and the Treasury supports them. Many SOEs borrow from other SOEs, such as the Ceylon Electricity Board borrowing from the Ceylon Petroleum Corporation, with no intention of returning the loans. 

Many State-Owned Enterprises (SOEs) borrow from the two State-owned banks, the Bank of Ceylon and the Peoples Bank. Because of their unprofitable structures, these SOEs will be unable to borrow from private lenders, but with political intervention, they will be able to borrow from State financial institutions.

The President proposed selling even profitable SOEs to pay off debt, citing the experiences of Sri Lanka Telecom (SLT) and Sri Lanka Insurance Corporation. While only tiny steps have been taken in this direction, opposition and backlash appear to be coming from the same unions that are criticising greater tax burdens. 

Privatising SOEs in a strategic and constructive way is a difficult endeavour. Private sector efficiency alone will not deliver a satisfactory return on investment, which is one of the reasons why SriLankan Airlines did not have a lengthy and exciting queue of possible buyers. 

In order to deliver better value and obtain higher prices, Sri Lanka may need to combine its profit-making and loss-making enterprises. Any sale of national assets must be weighed against the prospective sale price, the asset’s long-term prospects, the industry in which it operates, and the importance of the industry to national objectives.

However, there appears to be a sense of disinterest in the Government’s sluggish dialogue. They wasted no time in announcing that the Government will privatise SriLankan Airlines, which had travelled to 126 destinations in over 60 countries previous to the outbreak. Even before COVID-19, the carrier suffered with a strained balance sheet and may fail to make payments to aircraft lessors. The loss (before tax) of SriLankan Airlines for the year ending 2022 is 170.8 billion and is struggling to find a buyer ready to take it on.

This sense of apathy is not surprising, given President Wickremesinghe’s recent tenure as Prime Minister under the Yahapalanaya Government, which includes the contentious long-term lease of the Magampura Port in Hambantota to a Chinese corporation. 

The Rajapaksa administration spent approximately 1.5 billion dollars to build the port, with cashflows falling short of projections as Sri Lanka approaches a liquidity crisis due to future debt commitments. As a result, only in the eleventh hour did the Yahapalanaya Government lease 70% of the port to the China Merchants Port Holdings Company for 99 years for roughly 1.2 billion dollars.

Similarly, in September 2021, the Adani Group, one of India’s top firms, agreed to a 700 million dollar deal to build a deep-water container terminal in Sri Lanka, describing the project as a “strategic game-changer” in the contest for influence between Beijing and New Delhi. This too was anything but a thought-out strategic deal in the best interest of the country’s balance sheet. We cannot afford to wait any longer for foreign relief, before we decide to clean up our act.

What’s worse, was that the guaranteed sale of assets, even at a favourable price, does not mean the same provision of quality on these goods and services provided. The citizens and political class have yet to fully comprehend that the development of success stories such as Singapore, India, Vietnam, South Korea and Taiwan had far more to do with State intervention and organisation than with any elusive invisible hand or even maximising their own competitive advantage.