Politicians may oppose, but SOEs need reform

A state entity in our country can never achieve that kind of efficiency because of some inherent issues such as political interference, mismanagement, corruption, wastage, inefficiency, indiscipline and lack of incentives. With whatever plans and restructuring efforts we have failed to produce any positive results in these state enterprises and all know they have the potential of becoming profit making institutions under right management


By Gamini Abeywardane

On the occasion of the 45th commemoration of Phillip Gunawardena, the architect of Sri Lanka’s Socialist Movement on Tuesday former President Mahinda Rajapaksa echoed a popular socialist sentiment when he opposed the government’s policy of divesting state owned enterprises (SOEs). He was critical of the idea of privatization and advocated reforming loss making entities while they are in state control. The idea is fine, but our experience is such ideas have not worked under any of the past governments including his own administration, despite much talk about converting such entities into profitable institutions.

On the contrary, we could see how SriLankan which was a profitable airline under Emirates management became a monumental loss under state control. At the other end is Sri Lanka telecom which had poor performance as a state entity which now has not only become a top performer, but has also revolutionized the entire telecom sector in the country after its partial privatization. Many years ago one had to be a Member of Parliament or a top government official, if one were to obtain a home phone line, that too after being in a waiting list for quite some time. But now it is a matter of one or two hours and just a phone call away – there are enough and more telecom players competing with one another to come home and fix it.

Then take the case of garbage disposal and cleaning of the city of Colombo. Anyone would remember how untidy the city was with dumps of garbage strewn here and there, stray dogs often feeding on them while the municipality had a large number of excess employees among those dedicated to keep the city clean. It’s no secret that most of them were supporters of various politicians and many of them were drawing their salaries even without being physically present at work while attendance were marked through proxies. Now as a result of outsourcing such work to well organized private sector companies we see a clean city with garbage being removed on daily basis at the correct time. These companies are no doubt making a good profit. It’s because they manage their workers well and do the work with the minimum number of people ensuring maximum utilization of the resources.

A state entity in our country can never achieve that kind of efficiency because of some inherent issues such as political interference, mismanagement, corruption, wastage, inefficiency, indiscipline and lack of incentives. With whatever plans and restructuring efforts we have failed to produce any positive results in these state enterprises and all know they have the potential of becoming profit making institutions under right management.

What we have witnessed in our country is that governments at popular demand keep stuffing all institutions under them with their supporters irrespective of whether there are vacancies or not, especially when elections are around. Politicians generally do not work like businessmen. They have no idea about efficiency or return on investment. They only think of how to remain in power. Therefore the general tendency is to do whatever is within their powers to remain in power and that is how most of the state controlled enterprises became white elephants.

Always there is a vast gap between what is economically right and what is politically feasible. Politicians themselves often do not have the necessary discipline to make these institutions work as they themselves are corrupt. As far as we see making state enterprises profitable under government control is a near impossible task with our political culture. 

Divestiture of assets belonging to the state to private sector is a method adopted in many countries as a means of converting lossmaking enterprises into viable entities. Any structural changes in these entities are generally resisted by the workers and their trade unions as they feel insecure with reforms while they are happy to continue with the existing state of affairs. However, these institutions are a burden on the economy and the people in the long run as ultimately they are sustained with taxes from the people.

The situation is made worse when politicians, especially when out of power start backing the wrong side for political gain and try to undermine any efforts at reforming these institutions. Even any form of restructuring is viewed by the workers as a first step towards privatization and therefore generally opposed.

In countries where there is no such political culture like China, Singapore and UAE state enterprises have often produced good results under proper management. Even in neighbouring India there are  well-run state enterprises. Some popular examples of such entities are Emirates Airline, Singapore Airline, Indian Oil Corporation and Sinopec in China. It’s worth finding out why such achievements are not possible in Sri Lanka. Merely opposing privatization is not going to solve this problem and if privatization is not acceptable then we should go for Public Private Partnerships.

As already suggested by the current government this can be achieved by setting up a government owned holding company on the model of Temasec Holdings in Singapore or Investment Corporation of Dubai (ICD) with a mandate to consolidate and manage all government portfolios in state enterprises brought under them. It could provide strategic oversight by developing and implementing strategy and corporate governance policies for the long term benefit of the country.

It is vital to get the private sector into these entities, if we are to reform them in any meaningful manner. Without introducing good corporate governance and discipline they can never be reformed. How much of the shareholding should be divested can be decided depending on the strategic importance of each enterprise. It is understood that the state should have a greater say in certain vital areas, nevertheless it is futile to have that say if these enterprises are only adding burden to the economy. 

It is important to have a dialog on this issue and explain to the public the gravity of the situation and the urgent need for reforming these entities, so that all political parties can contribute by suggesting ways and means of depoliticizing the management of these entities and improving profitability without merely opposing reforms for petty political gain.