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By Uditha Jayasinghe
Reforming State-Owned Enterprises (SOEs) is essential but to do so employees need to have faith in their policymakers, transparency needs to be assured and the financial consequences of their losses need to be clearly communicated to the public, according to a set of experts.
SOE reform is needed to reduce pressure on the Budget, improve services delivery and reduce politicisation was discussed at the recent Sri Lanka Economic Summit 2019, titled ‘Re-calibrating Sri Lanka’s Economic Trajectory: Towards 2025,’ organised by the Ceylon Chamber of Commerce (CCC).
State Minister of Finance Eran Wickramaratne speaking at the panel discussion titled ‘State-Owned Enterprises; Recipe for Reform’ called for the identifying of strategic SOEs and following a rationale to decide what SOEs the Government could retain ownership of and what it could handover management of to another entity.
Strategic decisions
“We need to consider what the point of Government owning business is. There may be a strategic reasons such as market failure or services access, for example busses run by the private sector may not want to ply a route because it is not profitable so in a situation like that the Government has to step in. However, the Government does not have to own a company to be able to provide that service, they can do it in other ways. There may also be national security reasons. Anything ranging from food security to energy security.”
“When you consider entities like the CEB and CPC or SriLankan you wonder why we are hanging onto some of these. The CEB has many been for social reasons because we want to subsidise the poor, then the question is whether you really need it to be a monopoly because it breeds inefficiencies. So even if you have a strategic reason you have to break the cognitive reason, you have to have a competitive environment,” he said.
The first takeaway is that the confidence in the Government and the intentions of the Government must be conveyed to the parties. Secondly any party must think about the meeting point between what the Government can do and the role of the private sector. We have been playing fast and loose with that for a long time. No government has clearly spelt out the role of the private sector and has not given them the right incentives and does not see them as a possible solution to SOEs – SLFP MP Dr. Sarath Amunugama
Wickramaratne contended that there is a gap between the United National Party’s (UNP) view of SOEs and the Government’s policy. He argued that it was the party’s position that if a subsidy needs to be provided that should not result in the institution becoming inefficient but the subsidies could be provided through the Budget and not the SOEs. He pointed out that even though there are two companies in the petroleum market, the duopoly has failed to resolve inefficiencies inherent to the system.
When it comes to SOEs such as SriLankan Airlines there is no strategic reason, he emphasised, which has been underscored numerous times. He called on the public to consider whether maintaining the airline was really worth the cost incurred to the State as even strategic decisions have cost attached to them.
“If you attempt to take action on these then the discourse is that you are selling national assets. So in Parliament on day I said I’m willing to give the airline for $1 to Mahinda Rajapaksa. The reason I said that was because sometimes it is very difficult to communicate the financial liability of these SOEs. We do not have to own most of it but if we decide to own something for strategic reasons, then that involves a political price and that should be compensated by the National Budget. Anything else needs to be commonly held, such as Temasak in Singapore where private individuals run Government interests. So we need to make sure fit and proper people are appointed to the boards and senior management.”
Wickramaratne advocated that since politicians do not like to give up the powers and privileges that they have to appoint SOE heads, it was proposed that nominations be kept in the hand of the Minister but his recommendations are subjected to an independent evaluation process ahead of the appointment, much like the banking sector.
“Your often wonder if this is the policy then why does it not get implemented? I must admit that sometimes the political will lags, particularly as it is a reflection of the mandate itself. If the mandate is decisive then it makes it easier and if the mandate is mixed then that makes it more difficult.” He contended that privatisation done in the 1990s was possible because the UNP was in the Opposition and therefore supported the Government that was in power at the time to push through measures that saw the privatisation of Sri Lanka Telecom and South Asia Gateway Terminals.
Earning trust
Parliamentarian Dr. Sarath Amunugama recalling discussions to change the ownership structure of some SOEs in the 1990s said that unions and other stakeholders were willing to listen as they trusted the Sri Lanka Freedom Party (SLFP) and its policies over those of other political parties.
“The first takeaway is that the confidence in the Government and the intentions of the Government must be conveyed to the parties. Secondly any party must think about the meeting point between what the Government can do and the role of the private sector. We have been playing fast and loose with that for a long time. No government has clearly spelt out the role of the private sector and has not given them the right incentives and does not see them as a possible solution to SOEs.”
Given our political culture Sri Lanka is not yet ready for privatisation. That doesn’t mean we are against everything. We are totally for Public-Private Partnerships as long as they are good ones, we are for listing companies to bring good corporate governance practices. But outright privatisation has always had its own problems and that is the concern we have – Helicon Corporate Consultancy Chairman Dr. Nalaka Godahewa
He also argued that reforms of SOEs will not be possible unless there is a parallel arrangement to divert people from the overcrowded State sector to the more productive private sector. As elections loom closer Dr. Amunugama pointed out that increasing hires by governments will only make the problem worse in the long run. This means that the private sector has to be expanded and jobs therein also have to be made more attractive, especially the pension issue, which has been left unaddressed by successive governments.
“We also have to overhaul the education system, to move away from the humanities based system and enter a technology and skills based framework. Unless we can have new growth areas and people are better trained to go into those areas where they can have satisfactory employment we will not be able to resolve the challenges posed by SOEs.
SL not ready for privatisation
Helicon Corporate Consultancy Chairman Dr. Nalaka Godahewa said that while he believes in a very strong private sector but the State sector should also be strong and be an enabler of growth. He argued that these two sectors cannot be separated and advocated moving away from the assumption that there is something inherently wrong with SOEs that need to be fixed.
“Why are we only talking about the SOEs? How many companies in the private sector are making losses? How many were closed during the last year? How many have made a significant contribution to the economy? But we don’t talk about them because they are considered to be private affairs. That is fair enough.”
Dr. Godahewa also said that there was an 80:20 ratio when it comes to loss-making SOEs in Sri Lanka with 20% making profits and the remainder losses. He cautioned against making generalised assumptions regarding SOEs and argued that privatisation was not a solution, especially given the controversial history of privatisation in the country. “Look at happened with Hambantota (port). This is again a hugely questionable transaction, there was no international tender, only two companies were asked to submit unsolicited proposals. There was a picture painted that the port had to be sold because it was a burden on the economy, which is not true. The port was built by the Ports Authority, which was a profit making entity. The Authority borrowed $1.26 billion to build the port and they had enough time to repay the loan and would have raised enough funds. Even in 2016, with the loan repayments, the Authority was making profits.”
You often wonder, if this is the policy, then why does it not get implemented? I must admit that sometimes the political will lags, particularly as it is a reflection of the mandate itself. If the mandate is decisive then it makes it easier and if the mandate is mixed then that makes it more difficult – State Minister of Finance Eran Wickramaratne
Dr. Godahewa also presented the view that the Government had selected the less profitable proposal and handed over the port to the company that was willing to pay more money upfront than consider the management proposal put before it. He also advocated that the Government should take a closer or more nuanced approach to the problems faced by the SOEs rather than lumping them all together and proposing privatisation as an overarching solution. He agreed that management needs to be made more independent and political interference in SOEs need to be minimised.
“Given our political culture Sri Lanka is not yet ready for privatisation. That doesn’t mean we are against everything. We are totally for public-private-partnerships as long as they are good ones, we are for listing companies to bring good corporate governance practices. But outright privatisation has always had its own problems and that is the concern we have. We have to be very clear about the objective of the SOE. It’s not just to make money but also has a social objective.”
SOEs part of the economy
The National People’s Power Movement (NPPM) representative Dr. Anil Fernando said that their stance was for a wide ranging democracy debate to take place to decide how SOEs can be handled and that the underlying principle is that whatever decision is taken must be in the public interest. He pointed out that any organisation would be focused on a self-serving structure and the challenge was to balance this out with a system that also served the public interest.
“The demarcation of the public and private sectors are also wrong because no matter which sector people are engaged in they are connected to the economy and the economy is inherently a public sphere. Only when a person is at home are their activities private but when they are part of the economy that becomes a public action or contribution. The perspectives of these two sectors can be different but they are intrinsically connected. This is why our policies focus on the public and private sectors working together to serve the public.”
Dr. Fernando was critical of SOEs being formed for what he termed as “private interest” pointing out that entities such as Mihin Lanka and Lankaputhra Bank were formed more as ego projects rather than assets to serve public interest. NPP polices therefore advocate for the feasibility, rational and business plans for SOEs to be laid out before they are established along with a governance structure that ensures an independent Boards of Directors.
He even proposed that trade unions should be made to feel more secure and drawn into the decision making process of SOEs so that plans can be implemented better. Trade unions are constantly made to feel that they are threatened and therefore could react with pushing for vested interests over the interests of the organisation or public interest. However, this should not result in them being alienated from the governance process.
