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Economic crisis: SOE reforms: It’s now or never

19 Jun 2022

  • Urgent need to stop SOEs making losses: Dr. Perera
  • Sound policy framework for long-term reforms needed
  • Improving efficiency and management of SOEs essential
  • Privatisation may be needed, but not only option
By Tanya Shan  The debate on how to reform State-Owned Enterprises (SOEs) and attempts to do so are not a new phenomenon in Sri Lanka. Such attempts were made in the 1990s with barely any noticeable changes over decades, former Director of the Central Bank of Sri Lanka (CBSL) Dr. Roshan Perera told The Sunday Morning. Perera believes that now is the correct time to walk the talk with the Government battling an economic crisis where it has become apparent that most of the SOEs cannot be run by the Government and urgent reforms are required to address this long-pending issue of SOE inefficiency.  Speaking to The Sunday Morning, Perera stated that the first and foremost move in reforming the SOEs should ideally be setting up a proper framework to do so. “The first thing that should be done is making sure that the SOEs are not selling any goods or services at a loss. There are various measures that could be taken to reduce the SOE losses and improve the efficiency of these institutions. If you take the Ceylon Petroleum Corporation (CPC), the prices have been steadily increasing, but what should have been done is that these price increases could have happened through the introduction of a pricing mechanism. Right now we do have a pricing formula, but we do not necessarily see it in operation. The CPC is still making losses,” Perera stated. CPC burden CPC has long been a burden on the Government, recording colossal losses annually. CPC public debt had reached Rs. 561.3 billion in 2021, while recording an operational loss of Rs. 41.7 billion in the year, the Central Bank of Sri Lanka’s Annual Report for 2021 showed.  Accordingly, by the end of 2021, the outstanding public guaranteed debt of the CPC witnessed a substantial Year-on-Year (YoY) increase of 62.5%. Meanwhile, the CPC accounted for 37.3% of the public guaranteed debt stock of SOEs.  Out of CPC’s debts, bank borrowings increased by Rs. 123.5 billion in 2021 to Rs. 505.3 billion, while trade receivables from public corporations increased to Rs. 161.1 billion in 2021 from Rs. 142.7 billion in 2020, mainly due to the growing liabilities owed by the Ceylon Electricity Board (CEB) and SriLankan Airlines. Trade receivables from the CEB and SriLankan Airlines accounted for around 90.1% of the total trade receivables of the CPC. “The Government cannot run institutions that are loss-making. At the moment, the Government does not even have funds to finance its own needs. Reducing losses and setting up a policy framework are some of the things that can be done immediately,” Perera stated, advising that the authorities did not have to wait until the economic crisis was completely addressed to start the reforms.  She stated that in terms of SOEs that were not making losses, the Government could take measures to improve their efficiency, bring about better management, ensure greater accountability, and have a good performance monitoring system to ensure that there were no leakages and no cost overruns.  “The Government does not need a lot of money to carry out these measures. It can get them done immediately. There are many such measures that can be implemented even amidst the economic crisis. Even though we might not be able to get outside investors to fund these SOEs, we can take steps to stop the cost-overrun. The country cannot afford to sustain these kinds of loss-making institutions,” she stated.   However, she advised that a policy framework should be prepared parallely, to find long-term solutions for the SOE burden on the Government, once the prevailing crisis eased. She emphasised that every SOE should have a different solution as one model could not address the issues of all the SOEs and added that when it came to certain SOEs, it was better for the Government to stay away from such businesses and hand them over to the private sector. “The Government really does not need to run hotels. It must have the right mechanism to address this issue – whether you are going to change the management or issue some shares to an investor. Now look at India, it is doing a great job. It has already privatised its airline, which was loss-making. It has got rid of it and the burden is off the Indian Government now. When Sri Lanka does not have money even to provide the basics, should it be funding a loss-making airline now?” Perera questioned. SriLankan losses It was revealed at the Committee on Public Enterprises (COPE) meeting that the loss of SriLankan Airlines as at 31 March 2021 from the day it was taken over by the Government amounted to Rs. 372,015 million. The total loss of the company following taxes in the year 2020/21 was Rs. 45,674 million and the operating loss has also increased, COPE Chairman Prof. Charitha Herath said. This was due to the impact of the prevailing Covid-19 situation, as well as rising costs of jet fuel, aircraft leasing costs, and other operating costs. The Committee observed that the adverse capital conditions of the Company had reached a critical level by 31 March 2021 and was therefore facing a problematic situation regarding its operations without the assistance of the Treasury. Reforming SOEs  The International Monetary Fund (IMF) in its Article IV report on Sri Lanka, issued in March 2022, encouraged the authorities to reform SOEs and adopt cost-recovery energy pricing. Sri Lanka has 527 SOEs, many of which accumulate billions of losses annually due to sheer mismanagement. Of them, 55 SOEs which are classified as ‘strategically important’ employ a full 10% of the public sector workforce or about 1.9% of all.  Former Central Banker and Open University of Sri Lanka First Chair of Social Studies Emeritus Professor Sirimevan Colombage told The Sunday Morning that the way to undertake reforms was to collaborate with the private sector and foreign entities, but he was uncertain whether the current economic climate was a good time to do so, as no partner or investor would be willing to come forward to collaborate. University of Colombo Faculty of Arts Department of Economics Senior Lecturer and Attorney-at-Law Dr. Shanuka Senarath told The Sunday Morning that establishing Public-Private Partnerships (PPPs) would be another way to reform SOEs if the Government wanted to still retain a presence in certain businesses.  A report by Advocata Institute on SOEs in Sri Lanka in 2019 states that patronage politics and a lack of oversight seem to have spawned a culture where politicians believe SOEs are to be exploited for their own ends, which continues to date. Meanwhile, the Advocata report also states that ministers face pressure from constituents for jobs or favours and State sector jobs are especially prized for their status and security. The political culture is such that granting jobs is perceived to be a necessary condition for re-election. It stated that SOEs incorporated as limited liability companies enjoy greater autonomy in the management of their affairs, allowing the minister to bypass Treasury or budget restrictions placed on recruitment. In the case of the State banks, it is even possible for the minister to exercise patronage by directing lending on preferred terms to selected constituents. Privatisation University of Colombo Department of Economics Senior Professor Sirimal Abeyratne noted that one way of restructuring was privatisation, while another way to carry out reforms was to list on the stock market. Further, Prof. Abeyratne noted that SriLankan Airlines could be totally privatised like India did with its national carrier, adding that India had been carrying out reforms successfully. India has been actively privatising its State enterprises in the recent past. In January this year,  India’s Tata Group took control of State-run carrier Air India, regaining ownership of the airline after nearly 70 years and marking a victory for Indian Prime Minister Narendra Modi’s privatisation push.  The conglomerate won the bid to take over Air India in a $2.4 billion equity and debt deal, ending years of struggle to privatise the financially-troubled airline that was kept afloat using taxpayer funds. According to the Advocata report, having so many SOEs is not the norm globally; many other countries, such as India, have been reducing their stakes in SOEs and in some cases, such as Air India, have been privatising them entirely. SOEs – particularly many in Sri Lanka – tend to be grossly inefficient, loss-making, and a burden on the taxpayer. The time is ripe for major SOE reforms.  


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