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Losses of state enterprises: A crisis on the rise

10 Jul 2021

By Yoshitha Perera   Sri Lanka’s state-owned enterprises (SOEs) continue to suffer massive losses for a prolonged period. As per the Mid-Year Fiscal Position Report 2021 released on 30 June, the total loss of the 52 major SOEs for the first four months of 2021 was Rs. 13.4 billion, recording an increase of Rs. 2.95 billion in overall losses when compared to last year’s report. In 2020, the overall loss of the 52 SOEs was recorded at Rs. 10.44 billion during the first eight months. However, according to this year’s report, out of 52 SOEs, 33 have recorded a profit before tax amounting to Rs. 69.4 billion while the other 19 SOEs made net losses amounting to Rs. 82.8 billion in the first four months. The report also notes that the 19 SOEs contributed to the government’s non-tax revenue in the form of paying dividends and levies accumulating to Rs. 6.84 billion during the first four months of 2021. Responding to a query of The Sunday Morning on the net loss incurred by the aforementioned 19 state enterprises, State Minister of Money, Capital Market, and State Enterprise Reforms Ajith Nivard Cabraal said the absence of a proper pricing policy is an impediment to these intuitions, moving forward. “If we don’t have a proper pricing policy, then most of these institutions will find it difficult to move forward. There are some government policies in some instances to provide a particular product or a service at a price that is lower than the cost. It is a deliberate compromise,” he said. SOEs continue to play a key role in many sectors of the economy, such as supply chains, logistics, trade, energy, banking, electricity, water, ports, airports, and pharmaceuticals.   Explaining further, Cabraal said that as the line minister for SOE reform, he had highlighted that the Government has to take a clear stance on how these institutions will manage. “The fact is that many institutions are making these losses now because of their own inefficiency, but the government policy is providing certain services at certain prices which are less than what it costs,” he noted. The State Minister added that all governments have to follow the above procedure while providing a safeguard to those operations. “The issue is with many major SOEs. In such instances, we need to take some decisions to clear the path of these enterprises towards greater resilience as well as greater ability to face all the difficulties of doing the business itself,” Cabraal added. Losses are still at high level According to the 2021 Mid-Year Fiscal Position Report, the key loss-making state enterprises are the Ceylon Petroleum Corporation (CPC), SriLankan Airlines, Ceylon the Electricity Board (CEB), and the Sri Lanka Transport Board (SLTB). Although demand for electricity increased by 23% in the first four months of 2021, as per the report, the CEB has recorded a loss of Rs. 7.5 billion so far. The total outstanding obligations, including project loans, stood at Rs. 371,299 million as at the end of April 2021, while the outstanding obligations to state banks due to working capital requirements stood at Rs. 107,219 million. The report also notified that CEB’s total payables to CPC and independent power producers are Rs. 126,869 million. The CPC had also incurred a loss of Rs. 45.3 billion during the first four months of 2021. Although the overall demand for petroleum products increased by 7% to around two million metric tonnes (MT) in the first four months of 2021, the CPC reported negative accumulated retained earnings worth Rs. 382 billion as at end-April 2021. According to the report, as a result, the CPC’s outstanding borrowings from two state commercial banks increased to Rs. 670 billion as at end-April 2021 from Rs. 529 billion as at the end of 2020. The report also mentioned that the outstanding dues to the CPC from various enterprises, mainly the CEB and SriLankan Airlines, stood at Rs. 149,602 million as at end-April 2021. SriLankan Airlines has also incurred a loss of Rs. 24.8 billion in the first four months. In the wake of the Covid-19 pandemic, the operations of SriLankan Airlines have been completely changed and it has had a negative impact on the airline industry. As per the report, the Government continued to support SriLankan Airlines with the infusion of new equity capital. The Government has also approved the re-issuance of all Letters of Comfort that expired during the period, amounting to $ 205.4 million and Rs. 27.6 billion, in favour of two state banks in order to continue with the provision of short-term loan facilities. With cabinet approval, the two state banks had also provided $ 75 million for working capital purposes in 2021. However, during the year 2020-2021, SriLankan Airlines recorded a loss of Rs. 45,162.76 million with an accumulated loss of Rs. 372,015.25 million as at 31 March 2021. According to the report, SriLankan Airlines’ net assets are less than half of its capital and the airline is facing a serious loss of capital. In addition, the SLTB has also recorded a loss of Rs. 1 billion during the first four months of 2021. Compared to last year’s report, a loss of Rs. 223 million was incurred during the first eight months of last year. SOE losses a constant problem Calling the matter a perennial problem, former Central Bank of Sri Lanka (CBSL) Deputy Governor and senior economist Dr. W.A. Wijewardena said the country has not been able to run any of these institutions profitably throughout the country’s post-Independence history. “The government has failed since they have failed to introduce professional management to these institutions. As a result, these institutions are continuing to make losses,” he noted, highlighting the fact that introducing professional management to these institutions and freeing them from political interference are essential. “These institutions have to make economic choices and business choices on their own, as in Singapore. Without implementing such a mechanism, just discussing the losses every year won’t help us,” he added. Sharing his views with The Sunday Morning, Advocata Institute Chief Operating Officer (COO) Dhananath Fernando said the economy has to manage the limited resources and the government should create a level playing field by involving the private sector to run certain SOEs. “The different governments have different views. Some administrations think that there are certain services that, as a government, they should intervene and offer to the people. However, we have to understand that in business, the basic principle is that when your money is at risk, you have a natural motivation to get higher returns. However, when you manage someone else’s money, you don’t have that intention.” While mentioning the fact that the same SOEs had incurred losses during the past 10-year period, Fernando said that there are certain institutions that could be handled by the private sector. “I think the airline business can be managed as a private sector entity since it has been marking continuous losses for a long period. If we look at the gravity of the losses that occurred in the past four months, it is almost about half of the entire Samurdhi allocation, which is about Rs. 52 billion for the entire year.” He further added the loss-making SOEs have become a major problem to the country and it is a reason the economy is not moving forward. Explaining that most of the state entities are making transactions through dollars and they have to sell their services in rupees, Fernando said that just providing government loans and creating sufficient cash flows to run the entity would not assist in improving the efficiency of that particular institution.


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