Time for privatisation

Following the worst economic crisis since Independence, the chorus is growing for effective restructuring of State-Owned Enterprises (SOEs) including outright sales, privatisation, listing on the Colombo Stock Exchange and where possible Public Private Partnerships (PPPs).

The renewed discussion and debate is after over 15 years of inaction beginning from President Mahinda Rajapaksa regime and his advisors who simply said no to privatisation as part of election campaign promise. This stance was populist but the very polity is the victim today having to bear the cost of a State sector that ballooned under Rajapaksa benevolence.

As per the Public Sector Employment Survey conducted by the Central Bank, total public sector employment in 2021 increased to 1.5 million as against 1.2 million a decade ago in 2011. Some estimate that the actual increase is over a million. Of the total Rs. 1.27 trillion tax income, 88% or Rs. 1.11 trillion goes to paying State sector employee salaries and pensions. This fact alone makes a compelling case why the Government should take a serious look at restructuring of the public sector apart from natural productivity and efficiency benefits to the public and potential new sources of tax revenue.

The big loss making SOEs – Ceylon Petroleum Corporation, Ceylon Electricity Board, SriLankan Airlines, Sri Lanka Railway and Sri Lanka Transport Board needs immediate action despite trade union pressure. It is welcome that soon after being appointed as Prime Minister in May, Ranil Wickremesinghe said SriLankan Airlines would be privatised. 

The challenge in realising privatisation under the now President Wickremesinghe is the fact that within the Government ranks there remains a plethora of anti-privatisation Rajapaksa loyalist MPs who voted for Ranil at the 20 July secret ballot in Parliament. Pro-Ranil proponents of SOE restructuring are confident that as the Executive President he will fast track the initiative. However, only time will tell.

Recently the Economic Intelligence Unit of the Ceylon Chamber of Commerce in partnership with the Colombo Stock Exchange (CSE) stressed that a super-holding company for managing SOEs has been identified as a globally successful model. This model allows the Government to adopt a more arms-length approach to SOEs’ operational decision-making, relieving it of the direct responsibility of overseeing all the SOEs dispersed across various industries, and redirect its budget and energy elsewhere.  The merits of this model have enabled countries such as Malaysia and Singapore, which have similar holding company structures, to ensure impressive performances of their SOEs. Successful models of Singapore’s Temasek Holdings and Malaysia’s Khazanah Nasional are cases in point.

Whilst both Temasek and Khazanah are best practices for emerging economies, it may be foolish to adopt the models in Sri Lanka sans the inherent natural and institutional dynamics prevalent in the two countries.  Unless necessary reforms, laws and work and management culture are in place, introducing Temasek or Khazana type holding company structures for SOEs may not work. To be more realistic the eventual goal could be setting up such a structure but beforehand the necessary conditions and a degree of early reforms and restructuring of SOEs must be ensured. A case in point is that Sri Lanka’s port sector is a model for PPP and has had enough learnings. But after two decades of private sector managed and majority owned terminal operations, Sri Lanka is yet to establish the necessary regulatory body for oversight on best practices.  The State-owned Sri Lanka Ports Authority continues to be the landlord, terminal operator, shareholder as well as defector regulator of sorts. If the new Government is sincere and keen on promoting privatisations and PPPs as an essential strategy, then appointing a regulator to the port sector is a must. Given Sri Lanka’s own macroeconomic challenges and petty politics, the desired model such as Temasek or Khazana will take time. In the interim, Sri Lanka can re-introduce transparent privatisation of SOEs via the Colombo stock market. The Sri Lanka Telecom (SLT) exercise and its success remains a home-grown model. 

The Daily FT in its 18 April issue published a list of Government owned assets worth a staggering $ 11 billion which the Government could explore to divest or maximise returns with private sector involvement. See ft.lk/front-page/Free-up-over-11-b-in-State-owned-assets-to-ease-reserves-crisis-Experts/44-733521.  This could be a starting point. Some of the entities listed include profitable entities with considerable state ownership. Listing some of these entities on the CSE with a stake on offer for a strategic investor and the public is also another option. Whether an International Monetary Fund program happens early or later, it is in Sri Lanka’s future interest that SOE reforms are made a priority.