What can we do about SOEs?

Tuesday, 8 July 2014 00:34 - - {{hitsCtrl.values.hits}}

It is commonly known that in financial terms State-Owned Enterprises (SOEs) have often performed very poorly. Many firms in that sphere operate at a loss, entailing heavy opportunity costs to the national economy. They place a heavy fiscal burden on the State through explicit subsidies, and the assumption of operating losses, or re-capitalisation costs, made necessary by the continued erosion of the capital structure of enterprises. In non-financial terms, the results of SOEs in developing countries are not very different from its financial terms status, since it also has been frequently disappointing. With the provision of goods and services often being deficient, and water and electricity supplies in particular often limited and unreliable, hindering the country’s competitiveness and harming public health, very few SOEs in manufacturing are able to compete internationally.

The scenario is not very different in Sri Lanka. Like its peers in the region, it has its fair share of loss-making SOEs which both directly and indirectly have impacted the economic in a negative manger, in addition to the spill over effects to the public, the tax payers. To create awareness amongst the public on the status of SOEs in the country, the Pathfinder Foundation recently held a seminar in Colombo titled ‘Government-Owned Enterprises: What to do? How to do?’ moderated by Institute of Policy Studies (IPS) Senior Economist Anushka Wijesinha. The seminar discussed at length the global scenario in this regard, the local status and recommendations on moving forward. SOE reforms in the world, post-privatisation According to the World Bank data on privatisation, there were over 8,300 privatisation transactions during 1988-1999, but only 1,858 transactions during 2000-2008 in developing countries. Yet, it is not just the volume, but the continuation of a focused privatisation with greater success. University of Colombo Department of Economics Professor Sirimal Abeyratne delivering his address on ‘State-Owned Enterprise Reforms and the Role of the Government’ noted that privatisation as a platform for ‘learning by doing’ SOE reforms, including privatisation or broad-based ownership structures under different mechanisms, continued to gain momentum since the early 2000s, especially in OECD countries and newly-emerging economies. According to OECD, reforms aimed at good corporate governance of the SOEs are an important prerequisite for effective privatisation to improve the bargaining power of the seller and to make the SOEs more attractive to the prospective buyers. He shared that in the 2014 revision of the OECD Guidelines on Corporate Governance of State-Owned Enterprise the institution is undertaking a review of the guidelines to take into account developments since their adoption and the experiences of the growing number of countries that have taken steps to implement them.

SOEs expanding the boundaries beyond domestic markets Looking at SOEs in global competition, that is export markets, global service trade, and off-shore investment and businesses as ‘Multinational SOEs,’ it is noted that out of the world’s 2,000 largest listed companies, 204 are SOEs originating from 37 countries where 70 are from China, 30 from India, nine from Russia, nine from United Arab Emirates (UAE), eight from Malaysia, seven from Brazil, six from Indonesia, six from Poland, six from Switzerland and five from France. “Even if the SOEs do not go beyond domestic markets, their inefficiencies by international standards make the economy uncompetitive in a globalising world,” Abeyratne. Sharing SOE reforms in China, he pointed out that in 2011 it was reported that China’s State-owned Assets Supervision and Administrative Commission (SASAC), the Government agency charged with the responsibility of monitoring and controlling China’s State-Owned Enterprises, showed a total realised net profit of $ 133.56 billion in 2010, up by 42.8 % over that of 2009. The profit was noted to be the product of decades of experimentations triggered by economic reforms in China. Does ownership matter? “Ownership does matter, hence performance differs when State-owned and private-owned enterprises do not operate on equal terms. Sub-standard performance and inefficiencies, a well-known issue in both worlds, result in massive costs to the nations in different forms,” stated Abeyratne. He elaborated that the different forms are that fiscal cost to the government that is apparently passed down to a third party, distortionary cost resulting in a resource misallocation and a paralysed business environment and long-term development cost affecting the overall development process of the country. “Non-reforming SOEs continue to lose their position not only due to internal inefficiencies, but also due to challenges of globalisation,” he added.

The Sri Lankan problem Sri Lanka currently has about 300 SOEs under different legal structures such as statutory bodies, limited companies, subsidiary firms, and even Government departments. According to the Ministry of Finance and Planning Annual Report 2008, there is heavy reliance on the Government budget for recurrent expenditures of several loss-making and non-functional public enterprises. There is non-payment of dividends to the Government by most of the minority share-holding companies, heavy public enterprise debts which have impact on bank performance and unusual accumulation of inter-public enterprise debts. The Ministry of Finance and Planning Annual Report 2012 shows that SOEs were supported through budgetary provisions inclusive of grants and loans amounting to Rs. 32.2 billion, and Government guarantees to selected enterprises such as Ceylon Electricity Board (CEB), Ceylon Petroleum Corporation (CPC) and SriLankan Airlines totalled to Rs. 321.2 billion, enabling these institutions to have access to funding from bank sources. When looking at all the loss-making SOEs, the CEB, CPC, and SriLankan Airlines together account for almost 80% of the total turnover. The losses of the three institutions alone stand at Rs. 190 billion which is higher than the expenditure put together for health and education, which is Rs. 189 billion. While the YOY losses are observed to be reduced when comparing the 2012 and 2013 figures, Abeyratne pointed out the improvements are not due to deliberate purposive reforms, but due to higher price charged by the public for services. Necessary reforms to overcome the situation To overcome this loss-making situation Abeyratne shared seven guidelines. The first is to have broad-based ownership, which according to him is very much needed to expand the ownership since it matters. The second is to have a good regulatory framework. Calling it a dire necessity, Abeyratne noted that with the Government having multiple objectives in its agenda, it should be cautious on not putting all its objectives in one basket. “The enterprise objectives should not be mixed with the objectives of the Government. There should be a clear regulatory framework defining where the Government should lay its boundaries,” he cautioned.

The third is to have clear transparency and disclosure of information. “After going through the reports of some big enterprises it is observed that there is no information disclosure. The gross figures are present but there are no cost structure, historical data and output sales. It has to be mandatory to have such information in these reports since the public needs to have access to those.” The fourth is to treat internal reforms as an internal matter. Currently the decision for internal reforms is taken outside the enterprise. However, the director board has to be autonomous and competent enough to take independent decision making. The reforms are not limited to the overall structure but also to internal matters. The fifth is to have sector specific reforms. For this the SOEs cannot and should not be put in one basket since each operates under different systems. So the specific sectors have to be classified. The sixth is to sort out the current economic and financial issues since most of the state owned enterprises are hit with these at the moment and it is imperative to have a way of transforming these things. The seventh is to stress for reforms. “Reforms should not be a onetime activity. It has to be a continuous process. They have to learn, correct the mistakes and continue to do so if they are to really change and improve their performance. Sri Lanka’s major problem is that we have a lukewarm strategy when it comes to the state owned enterprises,” noted Abeyratne.

The need for a ‘sunset condition’ Noting the performance of the SOEs, Sri Lanka Business Development Centre Managing Director Charitha Ratwatte stated it is quite a job for the institutions to continue without reforms. Speaking on the topic ‘Should there be a sunset condition for loss-making SOEs or should all SOEs be required to justify their existence?’ Ratwatte started off by explaining that ‘sunset condition’ typically means the process of change. With everything in this world functions within a time bound framework, nothing lasts forever. The only way to sustain institutions is to change according to the context. Businesses and enterprises that have successfully have survived over the years are those that have adapted to the changing financial and social environment. He pointed out there are enough examples of any successful business or enterprise that if to survive, it has to change, and sunset is a way of building that change. “There is an opinion that when you launch something you must build in a sunset clause. Not necessarily kill it on day 500 or so, but have a process where an institution has to come forward and justify its existence. This is important when you are playing around with taxpayer’s money,” said Ratwatte. Since it is the taxpayers’ money that is rolled out to run loss-making SOEs without any thought on how the leakage of public finances can be addressed, the institutions simply carry on, he added. Touching on the cost of manpower in SOEs, he pointed out there are institutions that exists only in the telephone directory, and not having proper functions or operations. Such is the State Enterprise Management Agency, initially created to take over some SOEs that are not functioning as they should. “The agency has five telephone numbers listed in the directory. There probably are employees as well who just get dressed and come to work to do nothing. These are all costs that add up. This is why the sunset clause is important,” asserted Ratwatte. He said typically there is a panel where the SOE will come forward and justify its existence. The panel should ideally consist of members from institutions such as the Chambers of Commerce, Institution of Chartered Accountants (CA), Institute of Directors, and other professional bodies. “There should be a public hearing. The SOEs should justify every so many years of having access to funds. If they are crashing, they should liquidate. Since they have access to easy money, which is the tax payers’ money, the State enterprises do not take the hit but simply continue to go on,” explained Ratwatte. The seminar was also addressed by Pathfinder Foundation Executive Director Luxman Siriwardena, where he spoke on ‘The Role of the Security Forces in Business: Rationale for Entry, Opportunities for Resource Mobilisation and Diversification’. Pix by Lasantha Kumara Q&A Session Following the presentations, a session was facilitated where the audience put forward their questions to University of Colombo Department of Economics Professor Sirimal Abeyratne, Sri Lanka Business Development Centre Managing Director Charitha Ratwatte and Pathfinder Foundation Executive Director Luxman Siriwardena. The session was moderated by Institute of Policy Studies (IPS) Senior Economist Anushka Wijesinha Q: Could the State enterprises take an example from what happened in the earlier decades and continue a situation of profits rather than adhering to losses? Abeyratne: With regard to learning from the past, the lessons are enormous, not only in Sri Lanka but also from other countries around the world. This is on the top of the agenda for most of the countries and there are rich lessons to be learnt from privatisation. Privatisation has had mixed performance in the past. If we are serious about undertaking a reform process, there is much to learn. Q: The agenda has been repeated several times. Why have the internal reforms not taken place as yet? Why are the SOEs evasive? Abeyratne: This is where the problem is. There should be political will. Even if there is no political will, the performers of the SOEs should push for reforms since the consequences of non-reforming SOE are huge on the economy. Q: Bonuses are paid based on profits. How come loss-making SOEs are paying heavy bonuses to the employees? Abeyratne: Some of the SOEs have the spoon in their hands because of the market they operate in, the monopoly market, and because of the protection that is provided by the regulatory framework. And also the loss of bargaining power of the key people of the company. That is why some loss-making enterprises can give heavy bonuses.