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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When will the power problem be resolved forever?

 

Restructuring of electricity sector will also require a huge amount of capital and it goes without saying that private capital has to be infused into the system in some way. Like in many state owned loss making institutions the very word ‘private capital’ is anathema to CEB workers who have vehemently opposed these restructuring plans.All major political parties are aware of the situation, but when in opposition they also try to make political capital out of these issues by opposing the restructuring moves.

By Gamini Abeywardane

The country just witnessed one of the worst blackouts in the recent times. Power cuts imposed twice a day, sometimes even without prior notice left most consumers furious and frustrated. The politicians and the top officials as usual were blamed for the calamity which caused much damage to the economy. In time for the New Year problem has been temporarily fixed hiring a barge mounted power plant amidst allegations of corruption.

The minister in charge proudly announced that there will not be any power cuts hereafter. But he owes the country a full explanation on how he is going to do that when we all know that it’s not possible. Critics say that continued power supply is possible only during the New Year season because of the decreased demand and power cuts at some point afterwards will be inevitable.

This is part of a cycle of events which we Sri Lankans have been witnessing from time to time over several decades. Politicians are engaged in leveling allegations against one another making political capital out of the unfortunate situation while some of them are alleged to be profiting from sudden power purchases. Country as a whole has to suffer huge economic losses while the people have to undergo many hardships.
Long unresolved crisis

At the root of all this is the long unresolved power shortage. For too long we depended on hydroelectricity and when consumption increased power shortages and power cuts became the order of the day. There was no consistent effort to identify the correct power mix and increase the output in keeping with the increasing demand. In short, for several decades there has not been any definite plan or consensus among the political leadership for systematic development of the power sector.

The Ceylon Electricity Board (CEB) has been run as an inefficient, oversized and loss making outfit for politicians to provide employment for their supporters. Because of its monopolistic nature and the presence of strong engineering unions no politicians had the courage to reform or restructure the CEB though it has been a long felt need.

Major reforms in the power sector became impossible due to lack of funding and opposition from various quarters. Finally the problem became too acute compelling the government to urgently look for other sources of power and coal power plant at Norochcholai was one such solution in a hurry.

In the not so distant past the machines at Norochcholai stopped for umpteen times due to technical issues. There were allegations of corruption and use of substandard components in the commissioning of that plant and most of the blame in this regard has been heaped on the previous government. There have also been questions about poor environment management raising huge issues about future use of coal.

However, all governments that ran this country in the past several decades are equally blameworthy for the power sector mess although both major political parties have been preaching on this topic with a lot of wisdom whenever they are in the opposition.

At the same time, one should not forget that plans by many governments to build such power plants had to be shelved in the face of mounting opposition by environmental groups and other politically motivated activists in the past.Despite whatever its negatives, the addition of 300MWof power from Norochcholai averted major power cuts in the last few years.

However, energy experts have pointed out that due to the inability to complete the proposed 500MW coal power plant in Sampur on time, country is likely to face a power crisis in 2020, similar to the situation in 2000. There has also been a long delay in implementing the 300MW power plant at Kerawalapitiya due to some controversy over awarding the tender. Sampur project had been cancelled because of the opposition for use of coal on environmental reasons. Whatever the reasons the end result is a power shortage causing hardship to people and great loss to the economy and the responsibility for any failure should lie with the government of the day.

Power mafia

In the meantime several privately owned diesel power plants also entered the power sector making use of the severe shortage of power. These are all temporary solutions, but there have been allegations of the CEB purchasing power at high prices. Thus, there seem to be an electricity mafia involving politicians, CEB officials and the businessmen. At the centre of all this is the unresolved power crisis and the politics behind it which makes it even more difficult to resolve the issue.

Then there is the other side of the issue, the high cost of electricity in Sri Lanka. Our electricity costs are probably the highest in South Asia and it is no doubt a great disincentive for foreign investors while also adding to the people’s cost of living here. Because of that, electricity is subsidized to domestic and industrial consumers. Since the electricity tariff is not cost reflective, every year the CEB makes a loss close to Rs. 50 billion. 

The only way proposed by economists, power sector experts and multi-lateral aid agencies such as the World Bank and the ADB to resolve this issue is to restructure the CEB which is an inefficient entity with colossal debts amounting to billions of rupees which has already become a burden on the treasury. In order to increase efficiency of the CEB and to resolve its debt issue, it has been proposed that three of its main functions –generation, transmission and distribution, should be separated.

Restructuring will also require a huge amount of capital and it goes without saying that private capital has to be infused into the system in some way. Like in many state owned loss making institutions the very word ‘private capital’ is anathema to CEB workers who have vehemently opposed these restructuring plans. All major political parties are aware of the situation, but when in opposition they also try to make political capital out of these issues by opposing the restructuring moves.

If we are to avert any future catastrophes in the power sector only way out is to seriously look at these restructuring plans and implement whatever is suitable from the country’s point of view with infusion of private sector capital where necessary. Country is already seeing the positive results of such restructuring in the once maligned telecom sector and there is no reason why same norms cannot be applied to the power sector.

However the reality is that no government is bold enough to take on the strong trade unions in the CEB because of its monopolistic nature. Although they know that restructuring the power sector is a necessity, no politician had the courage to face its political and electoral consequences and such moves become even suicidal especially when the elections are round the corner.

Whenever a drought continues for long and the weather gods are not in our favour, food shortages are the first thing to hit us followed by the energy shortage. Where the power issue is concerned we have been talking too long about inadvisability of continuing to depend on hydro power and the need for going into other sources of energy.

Many researchers have, with scientific data and statistics pointed out clearly and well in time, the country’s future requirements of energy as the economy grows and how to meet that. All calculations on the right mix of various energy sources such as hydro, thermal, coal and renewable energy had been done several years ago, but the question remains whether proper attention has been given to these suggestions and proposals.

Renewable energy

Hydro electricity is weather-dependent while both thermal and coal power are expensive and also not environmental friendly. And in this situation, the virtues of renewable energy are many and especially in a country where sunshine and wind are abundant, it is one of the most viable forms of energy. However, why no concerted effort has been made to use renewable energy, more specifically solar power despite sunshine throughout the year, is a question that begs an answer.

Even in countries like the US there have been arguments to say that there is a national conspiracy to prevent renewable energy from becoming the primary source of energy. In the US the conspirators are said to be the fossil fuel industry which continues to rake in exorbitant profits on oil and gas while it refuses to make any significant investment in renewable energy.

In the US main stream news media too has been accused of being subservient to the corporate interests and abstaining from doing any serious coverage on the viability of renewable energy.  The members of the Congress have been accused of being addicted to the big buck they receive from big oil and other traditional oil sources to block any worthwhile renewable energy legislation.

According to the US Department of energy, the amount of solar energy that hits the surface of the earth every hour is greater than the total amount of energy that the entire human population requires in a year. While the facts remain so, if we know that it works why don’t we use renewable energy in place of heavily polluting oil, gas or coal?

The primary reason is that the cost of renewable energy is still relatively high compared to fossil fuels although the gap is closing as the cost of natural gas and oil continue to rise. The price to install photovoltaic panels on the average home is quite high and affordable only for those who are well off.

But the common experience is when some product is mass-produced its price per unit should plummet. The one million dollar question is why solar power and wind power products are not promoted in a serious manner with appropriate duty concessions and mass produced.

With diesel mafia and connected interest groups being powerful in the energy sector the situation in Sri Lanka cannot be much different from the US and it’s time for us to have a fresh look at this energy issue  and formulate a stronger national policy on renewable energy and promote specifically solar and wind power.

On the overall energy issue the government seems to have risen from a deep slumber and appointed a cabinet committee under the chairmanship of Prime Minister Ranil Wickremesinghe to look at the short and medium term solutions to the power sector issues. Even if they do their job properly it will only be a temporary solution.

There is a strong need to have an independent body or mechanism fully empowered to handle the power sector on a long term basis in terms of the laws governing the sector while also meeting the growing demand as the country goes into its next stage of development. Such an outfit should have the authority to raise the necessary capital from whatever the legitimate sources with adequate participation of the government without having to depend on inexperienced politicians to handle this vital issue. It should also have its own mechanism to minimize room for corruption.

Though originally created for that purpose the CEB in its current form is woefully incapable of handling such a job. That is why restructuring this institution has become a vital necessity and that has to be done while the politicians in power look for temporary and short term solutions to the issue. We have been talking about it for too long and now with memories of power cuts still being fresh it’s time to concentrate on this onerous but vital task.
(The writer can be contacted on: gamini4@gmail.com)

 

 

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Will the budget offer some solution to public transport issue?

 

"How the buses run on the city routes during the peak hours of the day scaring all other road users to death is ample testimony for the dire need to put an end to the current primitive system of operating buses. The question is how the proposed system can be implemented without getting bus operations in each district under the control of one single authority"

By Gamini Abeywardane

The budget among its many proposals which have received mixed reactions seems to contain some valuable suggestions targeting the much needed modernization of the public transport sector. It has clinically looked at the public transport sector identifying some of the main causes for its chaotic situation today. The approach has been to look at it from a long term perspective rather than proposing some quick fixes.

However, going by the history of our budgets and their implementation most Sri Lankans would be quite skeptical until these proposals are fully implemented. Overall, the Budget 2019 which is before the Parliament appears to be one instance where problems of public transport have been looked at rationally at least.

The most significant proposal is the idea of getting the revenue from all buses into a Revenue Support Fund as a transitional arrangement and paying the bus owners on monthly basis for the number of kilometers operated. This could be a solution to the central issue right now which is the unhealthy competition to collect passengers at the expense of the safety and convenience of both commuters and pedestrians on the road.  

How the buses run on the city routes during the peak hours of the day scaring all other road users to death is ample testimony for the dire need to put an end to the current primitive system of operating buses. The question is how the proposed system can be implemented without getting bus operations in each district under the control of one single authority.

The rat race for a bigger daily revenue collection is an inherent problem in a public transport service operated with individually owned buses. Most buses are bought with leasing facilities from financial institutions and as a result bus owners fix a high daily target for the crew. The wages of the bus crew depend on the volume of the daily collection.

The situation is made worse because there is no practice of issuing tickets to the passengers which has given the opportunity for the drivers and conductors to pilfer whatever the collection made over and above the stipulated daily target. It should also be noted that every attempt by the authorities to make issue of tickets compulsory in the past has been resisted and stifled by the bus operators.

At the moment there is no employment security, proper salary structure or EPF and ETF benefits for those employed in the private buses making the situation worse. Drivers and conductors in this sector lack any permanency of employment or social status quite in contrast to the situation prevailing in countries where there are well developed transport systems.

Drawing attention to this issue, Finance Minister Mangala Samaraweera, in his budget speech, said that private sector bus employees will be given better job security with EPF and ETF benefits and will be eligible to get loan facilities as an incentive for better service towards passengers. It is a fine idea, but it is necessary to have some sort of permanent employment for them before this could be introduced and it is doubtful whether such a system can be implemented under a regime of individual bus operators.

Poor quality buses

The poor quality of buses in the public transport system at the moment is another huge issue. It is a known fact that the majority of buses belonging to both private sector operators and the SLTB are goods transport vehicles converted into passenger buses and as a result they lack the standard comforts found in original passenger transport vehicles.

When these buses were introduced to our roads several decades ago only very a few people owned motor vehicles.  The income levels of the people were quite low and nobody looked for comforts. Today the situation has completely changed and people look for more and more comforts and that is why there is a major shift from use of public transport to private motor vehicles.

Finance Minister admitted that fact when he said “Our transport sector is yet not meeting the needs of a middle-income county.”  As a remedy he proposes a Bus Modernization Program in the next five years to transform bus services across the country. It is proposed to expand the SLTB’s fleet with addition of 250 buses with safety and user-friendly standards in the next two years while they will also introduce buses that are more suited for those with special needs.

A concessionary loan scheme ‘City Ride’, under ‘Enterprise Sri Lanka’, has been proposed where the Government will bare 75% of the interest cost for private bus fleet owners to expand their fleets by a total of 1000 luxury buses. The private bus owners who are willing to purchase luxury buses instead of the existing old buses and the reputed companies who are willing to provide comfortable transport services for their employees will be entitled to this loan facility.

Under this scheme the maximum loan amount will be Rs 10 million with an annual effective interest rate of 13.86% while 75% of the interest will be borne by the government. The repayment period will be five years including a one year grace period.

There are proposals aimed at upgrading and systematic phasing out of three wheelers which now have become an integral part of our transport system. ‘Mini Taxi / Electric Three Wheeler’ scheme under ‘Enterprise Sri Lanka’ will be introduced to upgrade current three wheelers into electric three wheelers and small cars that will be more environmentally friendly, safer and comfortable.

Persons who are 35 years of age or above, who own three-wheelers currently used for hiring purposes will be eligible for this loan while the existing three-wheelers should be disposed. The maximum loan amount available under the scheme will be Rs 2 million with an annual effective interest rate of 13.86% while 75% of the interest will be borne by the government with a repayment period of five years.

Multimodal transport hubs

There is also a proposal to introduce within the next few months, starting with the Central and the Western Provinces, pre-paid fare cards, electronic tracking of buses, using GPS and information on next bus and bus schedules, delivered to the palm of the passenger through mobile applications.

Modern multimodal passenger terminals will be introduced starting from Makumbura and will include Kandy, Kadawatha, Pettah and Moratuwa. The budget also proposes to establish a Joint Bus Operations Control Centre connected to live digital data streams throughout the country to make bus transport an attractive option. The budget proposes to allocate Rs 1300 million to support these investments.

Recognizing the significant demand for improved railway services in the country, it has also been proposed to enlist the support of the private sector. In this regard, the minister proposes to allow the private sector to lease/rent Sri Lanka Railway’s carriages, and improve their facilities in the four main lines.

These proposals together seem to have the potential to bring about some fundamental changes in our public transport system without resistance from any segments connected to the transport industry both in the state and private sectors.

Theoretically at least, this seems to be a good beginning because more effective remedies like getting the private sector capital and management skills into government owned bus transport services or railway networks is not possible without facing resistance and much disruption in our country under the present circumstances.

However, as the saying goes the proof of the pudding is in the eating and the country has to wait and see how much of these seemingly good proposals would be effectively implemented during the period covered by the Budget 2019 that is expected to be passed by the Parliament this week.

(The writer can be contacted on: gamini4@gmail.com)

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WHY DID SRI LANKA SEEK CHINESE INVESTMENTS IN PORTS?

By Thilini  Kahandawaarachchi

 

During the last decade, China has heavily invested in ports across the world spanning from Africa to Australia. In South Asia, they built the Gwadar port in Pakistan and the Hambantota Port in Sri Lanka. Despite being a staggering US$1.12 billion investment, last week’s tripartite agreement between Sri Lanka Ports Authority, China Merchant Port, and the Ministry of Ports and Shipping has left many criticizing China’s investments in the Hambantota port. In light of China’s potential long-term strategic goals, many view Chinese involvement in Sri Lanka with unease. However, it is often conveniently ignored that it is the successive governments of Sri Lanka that actively sought Chinese investments. Therefore, it is important to examine why we sought Chinese investments in the first place.

China has been a forthcoming and non-interfering alternative to funding from international financial institutions and Western donors. They have the excess capital and the capacity to take high risks, and they financed the construction of the Hambantota Port at a time when no other country or development partner was willing to invest in it. Now a Chinese company has yet again come forward to further invest in the Hambantota Port to develop it rather than let it squander its immense potential while generations of Sri Lankans serve the debts on a non-performing port. From an International Relations point of view, China also serves as a counter balance against the regional hegemony of India and other influences on Sri Lanka.

Therefore, rather than solely blaming China for their opportunistic investments, it is important to recognize that it is our governments that have voluntarily and actively sought these investments and exercised their (our) will when they reached out to China to fund a massive port project among other infrastructure projects.

An investor, a donor, and a trade partner

Since the turn of the century, China’s exponential growth  and increasing influence in many regions spanning Australia, Africa, and South America have attracted the attention of the world. China has not spared South Asia in its unquenchable thirst for resources, search for strategic locations, and reach for emerging markets.

According to the Heritage Foundation’s China Global Investment Tracker, from 2005 to 2014 China spent US$870.4 billion in worldwide investments and contracts, out of which US$8.9 billion was invested in Sri Lanka. In contrast, according to the International Finance Corporation (IFC), which is part of the World Bank group has made cumulative investments worth US$596 million in Sri Lanka.

Even though Chinese investments in Sri Lanka are a very small fraction compared to China’s global investments in regions such as Africa or South America, taken in context and compared to other global investors such as the IFC, these are considerable figures, and China’s investments in infrastructure are prominent.

Chinese investments, grants, and trade are all intricately interlinked. In Sri Lanka, China is the biggest source of Foreign Direct Investment (FDI) pumping in more than US$400 million in 2014. China has been involved in a variety of projects such as the Norochcholai Coal Power Plant, Mattala International Airport, Katunayake Airport Expressway, Moragahakanda Irrigation Development Project, and the Southern Expressway, which is also the country’s first highway.

China has also been the largest donor since 2009. China extended US$1.2 billion worth of assistance in the form of grants, loans, and credit amounting to 54% of the total US$2.2 billion committed by foreign countries and multilateral agencies. On the other hand, the Asian Development Bank invested only US$423 million and the World Bank US$241 million. China provided Sri Lanka US$5 billion in aid over the last decade.
Some of China’s lavish gifts to Sri Lanka include prominent landmarks such as the BMICH, the Superior Law Courts complex, and the Lotus Pond (Nelum  Pokuna) Performing Arts Theatre among others. China also fulfilled 65% of its total pledged assistance to Sri Lanka.

China is not only a key investor and donor, but also a significant trading partner. It surpassed the United States as Sri Lanka’s second-largest trading partner behind India in 2013. In the same year, Sri Lanka’s bilateral trade with China exceeded US$3 billion. All these growing aid packages, trade relations, and investments indicate China’s increasing involvement in Sri Lanka and its lasting footprint in the region.

From string of pearls to one belt one road

Foreign policy analysts have explained China’s expansion in South Asia in the new millennium with diverse arguments. The most well-known among them, especially with regard to port construction is the theory of “string of pearls” which examines the intention of China in building commercial and potential naval bases along the Indian Ocean region, including countries encircling India.

Earlier this year, China turned the string of pearls theory propounded by the west on its head with the launch of One Belt One Road (OBOR) initiative. With OBOR, China is expected to play a global leadership role in building infrastructure connecting China, Asia, Europe, and Africa through ports, highways, railroads, pipelines, power, fibre and other networks.

A favourable alternative funder

Sri Lanka has enjoyed strong bilateral ties with China for decades. There are a number of reasons for Sri Lanka to prefer China to Western countries and multilateral organisations such as the International Monetary Fund (IMF), the International Development Agency (IDA), the World Bank, and the Asian Development Bank (ADB) to obtain funds. Unlike multilateral institutions, which impose numerous conditionalities based on human rights, democracy, and good governance, when extending development loans, China does not interfere in the internal workings of loan/investment recipient countries. Many countries perceive the conditionalities imposed by international organizations as undermining their sovereignty.

According to former Sri Lankan Foreign Secretary Palitha Kohona, the Chinese government believes that low-key communication and mutually beneficial dialogue, carried out on an equal footing is more efficient than the US approach of distributing money and exerting pressure.

Further, Western countries distanced themselves from Sri Lanka post 2009 based on war crimes allegations. During the nine-year tenure of President Rajapaksa, Sri Lanka moved away from its traditional funding partners such as the ADB, IMF, the World Bank and western countries, and inched closer to China. Though the present government initially seemed to distance itself from China in 2015, soon it realized that the West does not have the kind of resources that China has to support Sri Lanka, and that China’s tentacles in Sri Lanka are too deep. Besides, in the new world order, China is too big a player to take for granted anyway.

Unlike Western donors who have been reluctant to invest in these high-risk, large-scale infrastructure projects, China is ‘forthcoming’ with their development support and investments.

A counter balance for India and external influences

India has long seen itself as the natural leader in the Indian Ocean region and wants to ensure that its namesake ocean remains India’s Ocean. However, many countries both within and outside the region consider that the Indian Ocean is not only India’s backyard but also a region to which both littoral states and outside powers have a claim. With increasingly strong ties with the US and aims to curb China’s expansion in the region, India threatens to become an ever-greater hegemon in the region. While the US is strengthening ties with India, countries such as Pakistan and Sri Lanka are strengthening their ties with China as a way to counterbalance the regional hegemony of India.

A closer look at Asia reveals that one of the biggest fears for many countries in the region is strategic encirclement. India fears encirclement by China, while China fears encirclement by the US based on the close relations that US has with Japan, Taiwan, South Korea, and also its military presence in Afghanistan. When countries in South Asia reach out to China to fund their infrastructure projects, they are also driven by the fact that closer ties with China will be a way to balance power with India.

China has also been a formidable friend by supporting Sri Lanka in diverse international fora. For example, in 2012, China was strongly against the United States backed UN Human Rights Council Resolution against Sri Lanka. Supporting Sri Lanka against the UNHRC resolution, the former Chinese Foreign Ministry spokesperson Hong Lei stated that China opposes “using a country-specific human rights resolution to impose pressure” and China believes that the Sri Lankan government and people are capable of handling their own affairs. Though not openly admitted, Sri Lanka’s closer ties with China is also a balancing act to prevent the influence or interference from India, USA and other global players.

Achieving long-term development goals

Chinese investments are also justified as a way to achieve long-term development goals in terms of infrastructure development, employment generation, and trade expansion. The former government claimed that one of its main targets at the end of the war was to catch up on thirty years of lost development opportunities. China with its multi-million-dollar investments to put in place much-needed infrastructure became a dependable friend.

Considering that Sri Lanka is located at a strategically significant point along the Indian Ocean, Hambantota aims to be a hub port between Singapore and Dubai. When the Hambantota port project was proposed, the Sri Lankan government claimed it would bring in prosperity to one of the least developed regions of the country and create job opportunities and boost the local and regional economy. The increased economic activity is expected to boost economic development and contribute towards improving regional transport linkages.

Last week’s agreement for Chinese investment in Hambantota is endorsed with expectations of skilled employment generation, regional and national economic development, stabilising the Sri Lankan rupee, and the reduction of national debt percentage. Further, better transport infrastructure will provide better access to regional markets, especially those of growing economies such as China and India.

What’s in it for China?

There are a number of strategic, political and economic reasons for China to be interested in the Indian Ocean region and South Asia in particular. Though a Chinese naval base in Sri Lanka is far-fetched, it is evident that China is interested in maintaining its presence in the Indian Ocean region because of its strategic, economic, and political importance. Sri Lanka is key to gaining a strong foothold in the region and as a mid-point in the Indian Ocean where its vessels can refuel and crews can rest and recuperate.

As the world’s leading manufacturing hub and the second largest economy, China also needs to secure energy and goods supply routes along the Indian Ocean. Therefore, it is only natural that China is interested in gaining a firm foothold on strategic locations along the Indian Ocean such as Hambantota and find alternatives to chokepoints such as the narrow Malacca strait.

Further, these projects provide Chinese companies opportunities to engage in large-scale investments and earn revenue for decades. They also provide employment opportunities for Chinese labourers and for businesses to export Chinese machinery to be used in these projects. These investments also boost China’s soft power strategies by creating a presence and by being a catalyst for development. The growing economy of Sri Lanka provides a market, albeit small, for China’s manufactured goods. China is also strategically gathering supporters with these intricately linked economic, trade, and cultural relations.
I

n 2014, China established the Asian Infrastructure Investment Bank (AIIB), a multilateral organization, which will fund infrastructure projects in Asia. It will enable Asian countries to improve their infrastructure while China can strengthen its economic and geopolitical leadership. China has taken a bold step by stepping outside of the  established US-centric multilateral funding agency system and creating a China led-bank to fund diverse infrastructure projects in the region. The AIIB is also a strategy for China to legitimize its involvement in building infrastructure across the world and expand its reach beyond the periphery. Further, it is also a move away from the Washington based banks and Western norms to adopt a new set of norms and values based on China’s own experiences both as an investor and a developing country.

It is based on all those interests that China is making large-scale investments in maritime infrastructure in Sri Lanka and other South Asian states, and China insists that their investments are only pacific and based on goodwill between long standing friends such as Sri Lanka.

Conclusion

By nature, infrastructure developments are long-term projects that often take decades to actually reap their intended benefits. They often require further investment to develop facilities to make these projects profitable. Hambantota port was built as a transhipment and bunkering facility to refuel and provide supplies to the large number of ships that ply the main east-west shipping route. It still requires considerable investments to improve its services and facilities to make it a fully functional port.

The proposed Industrial Zone in Hambantota is important because a port needs goods to export, and the Chinese investments in the Industrial Zone will help to generate that volume. To reach its potential and reap the intended benefits of this port, it is important to implement long-term plans for Hambantota and not abandon it. That is where continued Chinese investments in Hambantota port makes sense. The Sri Lankan government does not have the funds to develop it, no other global port operator is interested in developing it, and now there is a global Chinese port operator investing in it albeit for 99 years on terms largely favourable to them. For Sri Lanka, what better alternative is there?

Speaking of China’s initial involvement in Hambantota, a senior Sri Lankan shipping professional says, “beggars are not choosers. We did not have the money or the expertise to develop a port. We had not built a port in the last 100 odd years… we could have bargained much better terms (with the Chinese investors) but at that particular time, we needed to see fast development.” No other country would be able to give some of the instruments that are required to build these infrastructure projects and the Chinese are very particular about timing and speed. That sums up yet another reason why Sri Lanka reached out to China for funding this port in the first place.
While it is true that Sri Lanka did not have many options but to depend on Chinese loans and investments, there are also a number of factors such as non-interference, lack of conditionalities, China’s expertise and effectiveness in infrastructure development, and continued good relations that make  China’s investments attractive.
The high interest rates, strict commercial conditions, and the alleged lack of respect for laws or the environment are some of the numerous drawbacks of Chinese financing and moreover, the lack of transparency in agreements with China has led to many controversies and alleged corruption. Now, add to all of that a 99-year foothold for China in Sri Lanka, and there is also the question what will China want next?

However, despite the common perception that China is opportunistically using Sri Lanka and many other countries as pawns in their great game in the Indian Ocean, it is in fact the Sri Lankan governments that have sought Chinese loans and investments. If our government plays its cards right, it is Sri Lanka that will eventually benefit from China’s investments. For that, it is important that the Sri Lankan government does what is needed to attract more FDI, develop an export economy, address issues of corruption and deliver on the promised good governance. Irrespective of whatever government is in power, it is also crucial to ensure that Sri Lanka does not become a playground for regional power struggles. Only time will tell whether that is too much to expect from our governments and its servants.

(Thilini  Kahandawaarachchi is an   experienced research and communications professional and has served several diplomatic missions and the private sector. She is also an Attorney-at-Law. This article is based on her Master’s thesis titled “Politics of Ports: China’s investments in Pakistan, Sri Lanka and Bangladesh” at the University of Washington, where she was a Fulbright Scholar. The views expressed here are solely those of the author in her private capacity.) (Email:thilini@uw.edu)

(Courtesy: www.nation.lk)

 

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Depoliticization: An alternative to privatization

 

Amidst recurrent protests all over the country which are almost a daily occurrence, the question arises whether it will be possible for the government to undertake these vital reforms, especially, if they are going to take the neo-liberal path of privatization

 

By Gamini Abeywardane

Along with constitutional and social reforms promised by the national unity government are all important economic reforms. They are necessary for the country to face the future successfully in the context of current global and regional developments. One important aspect of economic reforms is the need for converting the loss making state-owned enterprises (SOEs) into either profitable or some sort of manageable institutions reducing the colossal burden on the state coffers.

Amidst recurrent protests all over the country which are almost a daily occurrence, the question arises whether it will be possible for the government to undertake these vital reforms, especially, if they are going to take the neo-liberal path of privatization. Some institutions like the SriLankan Airline can be privatized without much issues but privatization in more socially sensitive areas in the current context could lead to massive protests offering much leverage to the forces which are waiting to topple this government.

In the government itself, there are divergent views on how to reform these enterprises. The UNP is generally known to be in favour of privatization while the SLFP is more cautious about privatizing the state ventures particularly those which are strategically important.

However, the SLFP in a major deviation from its traditional philosophy has emphasized the relevancy of public private partnerships. One of the resolutions adopted at its last convention said “Regarding loss making institutions, the SLFP’s position was that they should be restructured, but the government should have a majority stake when it came to public-private partnerships managing these institutions.”

A model where the state keeps a majority stake is favoured in some countries in consideration of certain social goals – such as energy security, economic development or job creation – to be as important as profit.

Poor corporate governance

In this context full privatization will be difficult especially in strategic sectors like energy, utilities, mining and infrastructure. However, SOEs in Sri Lanka have a reputation for poor corporate governance, lagging business performance and being half as efficient as their private counterparts.
The roots of the problems are many. SOEs almost always juggle multiple or even conflicting financial and social objectives, such as keeping electricity tariffs below the market price.

Finding talented people to work at SOEs is also a difficult task as the brightest and best tend to go to the private sector, where pay is often higher. Meanwhile, political appointments to managerial positions exacerbate the issue by limiting the autonomy of the SOEs.

In the face of these difficulties the best alternative will be to try and make them viable while they are under the state control. The task is really difficult because if they are to be made business oriented and viable, first of all the politicization which is the root cause of the failure of these institutions should be removed.

De-politicizing these institutions is not possible without removing the political control of these entities. The state control inevitably leads to political control which means priority is given to finding employment for those who are politically or personally connected to the politicians who are running these institutions.

Efficiency and competency which are necessary ingredients to make profit are hardly the norm in these institutions and political control thus becomes the greatest discouragement to the good and the competent employees. Meanwhile, the trade unions which are close to the politicians are also given priority over others and often they too have some say when it comes to day-to-day affairs of these institutions.

With these political priorities profit making naturally becomes the most difficult task in these entities and the idea of profit comes up only once a year when the treasury has to pump in funds to make up for the loss. To make things worse even annual reports are not prepared in time in most of these institutions even to find out what has really gone wrong.

This is definitely an indictment on the ability of the governments to run business. If you look at the past such instances are many. The bus services that were once running at profit under the private companies in the fifties became loss making entities when they were nationalized and placed under the Ceylon Transport Board. Profit making plantations became financially nonviable entities when they were taken over by the government.  Losses were so heavy, after many years the government had to restructure the plantations and give them to the private sector for management under long term leases.

Then there are other government owned businesses such as the Electricity Board, Railways, Petroleum Corporation and so on which could easily become cash cows under proper management, but which are causing huge losses under governmental control.

Even the state institutions which are not making losses are not making the type of profits that they should make.  This means that there are no adequate returns from the assets owned by these institutions when compared to the private sector.

Earning sufficient income for a growing population is a challenge for any government and the situation becomes worse when the country’s resources are not effectively utilized. That is why it is not advisable for any country to continue to own loss making entities for long. Treasury absorption of the losses means indirectly passing the burden on to the people and this unfortunately is not understood by the majority of them.

Public private partnership is a fine idea. But no private investor will buy a stake in a loss making entity, so the way to do it would be first to initiate the process of restructuring such institutions. But, unfortunately restructuring is often misunderstood as a first step towards privatization and therefore heavily resisted by the workers.

Temasek model

One way out would be to find a mechanism to depoliticize the management of these loss making institutions while they remain as state entities. A number of such enterprises have already been placed under the Ministry of Public Enterprises Development and it has also been reported that the government had looked at the possibility of forming a government investment company modeled on Singapore’s Temasek Holdings to manage state owned enterprises.  

In 1974, the Singapore government established Temasek Holdings to own and manage state-owned enterprises and 36 companies directly managed by the government were placed under its control. Today, Temasek is one of the largest SOEs which is quite similar to a private corporation.

Temasek is registered under the Companies Act and therefore is subject to all requirements applicable to private businesses. It behaves like an active investor guided by a strategy to maximize long-term returns. It should be noted that the government refrains from interfering in Temasek’s business decisions.

The state-owned enterprises under Temasek operate fully as for-profit commercial entities, on the same lines as private sector companies. They do not receive any subsidies or preferential treatment from the government.

The success of Temasek model has also inspired Chinese leaders who also had the problem of loss making state enterprises. Simply privatizing these entities remains out of the question for China’s leaders. But, there were alternatives, and Singapore provided one and over the years China has achieved tremendous success in reforming their SOEs.

A model that has been well tested in Singapore and successfully adopted in China cannot be bad for Sri Lanka. In a situation where privatizing is difficult the best alternative for Sri Lanka would be to adopt this model in a suitable way first and to go for public private partnerships when the SOEs are developed enough to attract private sector partners.

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A new country through Megapolis

 

By Gamini Abeywardane

With the onset of the new government, Megapolis has been a much used term, almost like a panacea for all economic ills of our country, but unfortunately ordinary folks seem to be at a loss where its true economic significance is concerned.

Probably this fact in mind, the ministry in charge of the subject last week organized an event mainly for the media heads where the subject minister Champika Ranawaka himself made a comprehensive presentation on what the ministry has been doing up to now in this regard.  He presented the salient features of the official blue print which we understand will be presented to the President and the Prime Minister shortly.

According to the project’s master plan, the Western Megapolis is envisioned and conceptualized as Sri Lanka’s Grand Strategy to propel the country’s drive to achieve the status of a ‘high income developed nation’ by 2030. It is expected to provide a holistic solution to some of the long standing ills of our country particularly in the sphere of urban infrastructure.

This development Plan will provide solutions to many problems such as poor mass transport, lack of urban housing, shanty dwellers, absence of garbage disposal systems, environment pollution, road congestion, inadequate leisure and recreation facilities and urban flooding.

Once these problems are sorted out in the Western Province there are plans to extend its scope to other major cities as well. If the Western Province can be developed as a major economic hub in the region, the benefits will accrue to the whole country while development prospects will spill over to the surrounding areas as well, catalyzing economic development in the whole country.

The new opportunities in terms of income generation will reduce unemployment while discouraging migration of qualified youth to developed countries. Insufficient infrastructure in education, transport, housing and lack of opportunities for high income generating employment are main reasons for migration of youth.

Among its ambitious goals is the plan to make the Megapolis one of the top 10 most livable cities in Asia attracting entrepreneurs and professionals, reversing the brain-drain and building upon the pre-existing conditions of absolute peace and guaranteed security.

It also envisages achieving ‘Housing for All’ with water, sanitation, electricity, waste management and other urban services and amenities while reducing poverty and unemployment rates to less than 1 per cent by 2030.

It will also create the digital infrastructure necessary for a smart city enabling transformation of the national economy into a predominantly knowledge-based innovation-driven economy,

Overall, it appears that a lot of progress has been made in this regard by way of planning, undertaking studies, research, approvals, negotiating necessary funding and effecting legal infrastructure. Although these are not visible to the eyes of ordinary people, some serious work has already been completed.

The project, when completed, is expected to change the face of the entire western province and provide the required infrastructure for investors to look at our country. Once Sri Lanka has in place, proper transport systems both mass transit and goods transport, enhanced port and airport fallibilities, better housing infrastructure and less road congestion, the country should be able to realize the full potential of its locational advantage of being on a major sea route.

Some significant infrastructure projects planned by the previous government such as Colombo Port City now termed Colombo Financial City and relocation of shanty dwellers have been incorporated into the new Megapolis Development Plan while vital new additions such as further development of the railway transport network to include a monorail system and extending it to cover new areas in the city such as Town Hall, Kirulapone and Borella also have been included in the project.

There will also be a network of elevated roads running through the city which will substantially cut down the travel time and reduce road congestion. There are plans to introduce a new ferry transport system through the Beira Lake further reducing road congestion, while providing a comfortable and pleasurable mode of transport. For example, people getting off at the Fort Railway Station will be able to use this lake based transit system to reach the National Hospital in a short period such as four to five minutes.

Learning from major cities in the world like London, Berlin, Seoul and Singapore which have used rivers flowing through them for economic development, the Megapolis project has plans to develop Kelani river for goods and passenger transport, sports and recreation which is a far cry from the present situation where the river is being used for disposal of waste material and its banks are illegally occupied by shanty dwellers.

The project will considerably enhance the attractiveness of Sri Lanka as an investment destination as it will remove some of the present disincentives through major infrastructure developments.

When our economy was liberalized as far back as late seventies we had some competitive advantages such as liberal environment, cheap labour, political stability and reasonably educated workforce. Over the last few decades many countries have opened their economies eroding our competitiveness while we no longer have cheap lablour.

By defeating terrorism we have removed one of the biggest obstacles, but there are so many other negatives in areas such as infrastructure, labour, environment and economic and political stability. The proposed Megapolis, if successfully completed will remove most of these obstacles and will give the country many competitive advantages.

The project which is a brainchild of Prime Minister Ranil Wickremesinghe was first mooted in 1994 during the time he was the Minister of Industries, Science and Technology and he attempted to revive it at least partially, through the Regaining Sri Lanka programme in the 2001-2002 period and none of these worked due to unforeseen political changes.

Now some of the post war plans of the previous Mahinda Rajapaksa government also have been incorporated into the new Megapolis Project with appropriate changes, while the peace prevailing in the country has provided a new platform for the implementation of this vital project which can change the future of Sri Lanka as a trade and investment centre.

Unfortunately, ours is a country where politics takes precedence over everything else and economic priorities were not given the place it deserved in our national agenda and as a result many countries in Asia which were far behind us fifty years ago have overtaken us in the run for economic development.

The ensuing frustration resulted in civil strife both in the south and the north and now it’s time to reverse some of those negative tendencies and there is no other project which can do this transformation better than the Western Province Megapolis.  The success of the project will depend on the support it receives from all political parties as it cannot be completed within the period of one government.

As pointed out by Minister Ranawaka its effective implementation will require some apex body like the Mahaweli Development Authority with adequate legal powers to deal with problems that may crop up from time to time during its implementation. However passing of a law to establish such an institution has still not been possible because of opposition from various institutions whose powers will be affected by such developments.

However, the fact remains that during the last several decades our country has missed many opportunities to develop its economy and our failure to address the infrastructure issues in time has contributed to this situation in a major way. With Japan, ADB and many internationally reputed private sector organizations having already come forward to assist the process Megapolis seems to be the grand strategy through which the country can rectify some of the past mistakes in the area of economic development.

 

 

 

 

 

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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.

  

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