Sunday, August 4, 2019

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Loss making SOEs need urgent reforms

But no govt. touches the issue because of political sensitivities

By Gamini Abeywardane

In the developed world the elections are often fought based on economic and social policies relevant to the time. For example the solutions to main problems facing the country should be in the manifestos of the contenders at elections and they should be part of the political debate.
Unfortunately in our country the situation seems to be quite different with various unexpected and emotive issues coming into the political debate around the election times. This has been the pattern ever since we gained independence.

Politics of the sixties and seventies was dominated by petty cultural, linguistic and racial issues to the exclusion of vital economic and national priorities. Who will give more free rice and impractical ideas like nationalization or providing government jobs took the centre stage of political debate sidelining the important issues.

Then with emergence of separatist ideas and onset of terrorism in the north the need for countering those tendencies came to the forefront becoming a dominant factor in all subsequent elections. These tendencies resulted in some of the critical issues not finding their due place in the ongoing national debate.

One such area that has escaped due attention is the loss making state enterprises whose burden on the treasury has been escalating at a rapid speed. According to the Ministry of Finance, during the first quarter of 2019 alone, fifty-five state-owned enterprises made Rs 59 billion in losses.

It has been reported that of the state-owned enterprises that make losses the Ceylon Electricity Board continues to lead the pack with a Rs 23 billion loss while the Ceylon Petroleum Corporation  has made losses of Rs. 21 billion and Lanka Sathosa Ltd made losses of Rs. 788 million during the first quarter of 2019.

This trend, if not arrested in time, can have catastrophic effects on the country’s economy and it’s time that political parties open this subject for public discussion without keeping mum over such issues for petty electoral advantage.

Many politicians in our country have opposed the idea of privatization or even part privatization for mere political expediency and have instead advocated reforming loss making entities while they are in state control. The idea is fine, but our experience is such ideas have not worked 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. Others had to be in a waiting list for several years.  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 suggested by the current government a few years ago this can be achieved by setting up a government owned holding company on the model of Temasek 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. However, for whatever reason no visible progress has been made in this regard.

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.


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