You reap what you SOE

The Advocata Institute recently held a forum on the ‘Urgency of State Owned Enterprise Reforms’, a matter they rightly referred to as a ‘priority of national importance’.

Loss incurred by SOEs has long been an issue that has worsened fiscal problems in Sri Lanka. Prolonged losses by SOEs, partly due to unsound decisions made by policymakers, have resulted in large budget deficits; and despite the need to reform critical SOEs, successive governments have failed to achieve this in a genuine and sustainable manner.

However, getting up-to-date accurate information on the state of SOEs is not as straightforward as one would like. The latest available analysis comes from 2019, as per the ‘State of State Owned Enterprises’ report released by Advocata themselves. In it, it was pointed out that internal control, monitoring and governance frameworks seem inadequate to deal with major problems of SOEs, making restructuring difficult – something that hasn’t changed in the last two pandemic-saddled years.

Of the 400-odd entities, regular information was only available for 55. Even obtaining a complete list of entities has proved to be a challenge. Financials are routinely late and only a minority obtain ‘clean’ audit reports. Of the 55, only 11 had published an annual report for 2016 by the time the Department of Public Enterprises compiled its Performance Report for 2017.

The latest figures meanwhile show that total SOE debt as of 2020 stood at over Rs. 1.3 trillion, up from roughly Rs. 1.1 trillion in 2019 and 2018, and around Rs. 900 billion in 2017.

While underperformance appears common, some are in deep trouble. In 2018, the CEB incurred a loss of Rs. 31.9 billion, that number rose to Rs. 85.4 billion in 2019, and Rs. 62 billion in 2020. The Petroleum Corporation carries a negative equity. Sheer incompetence and corruption have pushed SriLankan Airlines close to financial collapse; according to reports, it lost Rs. 17 billion in 2018, Rs. 44 billion in 2019, and Rs. 47 billion in 2020.

In the past, reports compiled by COPE and the Auditor General have highlighted repeated instances of fraud, mismanagement, corruption and negligence. The issues no longer appear to be isolated incidents of opportunistic behaviour by individuals, or occasional lapses in control, but point to deeper structural weaknesses, which need to be addressed by reforms, and when forming new SOEs.

Indeed, in its forum Advocata pointed out how most SOEs have not even repaid their cost of capital, with one particular example showcasing how one SOE had recorded some Rs. 500 million in profits, but that its loan repayments had been absorbed by the Treasury. This is an absurd state of affairs, and an attempt to hoodwink the public over the true state of SOEs

Despite being a relatively small country, Sri Lanka is estimated to have about 400 SOEs, and addressing their issues piecemeal has proved difficult. The passage of the 20th Amendment hasn’t helped matters, as it weakened audit and procurement oversight and exempted entities partially owned by the State from Auditor General purview.

Political appointees, poor governance and management, absence of market-based pricing and powerful trade unions that scuttle both good and bad reforms have been some of many perennial issues plaguing Sri Lanka’s SOEs for decades. However, reforms, which could include public-private partnerships or outright privatisation, come with political dangers that the Government may be reluctant to tackle.

That though is no longer – if it ever was – an acceptable excuse. With the country in the midst of debt crisis, the public can no longer afford to be burdened with financing such inefficient entities. Addressing the matter of SOEs must go hand-in-hand with the rest of the Government’s economic priorities if Sri Lanka is to emerge clear from its current economic crisis.