A primary proposal regarding State-Owned Enterprises (SOEs) put forth by the 2025 Budget is the establishment of a holding company to improve SOE governance, financial discipline, and operational efficiency. Experts believe that while a holding company for SOEs is potentially beneficial, its success depends on effective monitoring and governance, non-intervention, and continuous transparency.
Budget 2025 outlines the establishment of a holding company under the full control of the Government, under which selected SOEs will be held as subsidiaries with a view to improve governance, financial discipline, and operational efficiency. A holding company, as suggested by the International Monetary Fund (IMF), was also proposed in the 2024 Budget of the previous administration.
Improving governance and performance
The Ceylon Chamber of Commerce (CCC) explained to The Sunday Morning that by establishing an independent holding company, the SOEs would be transferred out of the various line ministries under which they currently operate and brought under the purview of the holding company, which would function under the Ministry of Finance. This will help improve the governance and performance of SOEs.
Further, the CCC noted that a line ministry’s primary objective of looking after the interest of consumers in each sector was often compromised when it was also involved in commercial operations as a producer or service provider in the same sector. Hence, the need arises to shift the commercial enterprises out of the ministries that formulate sectoral policies.
Accordingly, the objective of the holding company will be to ringfence the SOEs and provide them with the autonomy to function as professionally managed independent commercial entities.
Further, the CCC highlighted that the holding company would be responsible for monitoring the performance of SOEs through a well-structured process as was done in a private sector conglomerate. It will guide all SOEs to formulate corporate plans and to establish a vision, mission, and goals for their respective institutions.
According to the CCC, these can form the basis for Statements of Corporate Intent (SCIs) that the board of each SOE undertakes to comply with. It will also assist them to identify Key Performance Indicators (KPIs) and set targets in respect of each KPI for each financial year. The performance of each SOE will be monitored periodically against these KPIs.
“In performing its oversight role, the holding company will also stipulate minimum standards of corporate governance in line with best practices followed by public listed companies locally and overseas. It will guide all SOEs to implement these guidelines and will constantly monitor their adherence to the same.
“For instance, every SOE will be required to publish financial statements and annual reports by dates that will be stipulated by the holding company. All board appointments to SOEs will require approval from the holding company. Through these actions, the holding company will be able to drive profitability, transparency, and efficiency across all SOEs operating under it,” the CCC added.
Need to consider long-term implications
Speaking to The Sunday Morning, University of Colombo (UOC) Department of Economics Professor Priyanga Dunusinghe stated that the success of a holding company for SOEs depended on whether the Government could enhance transparency and efficiency in such a company and if the appointees could work independently and professionally, adhering to key corporate governance principles.
Prof. Dunusinghe elaborated that if the Government allowed a holding company to operate in a manner where the Government retained ownership but allowed the entities to function under corporate principles, it could be a suitable solution for loss-making entities.
However, he highlighted the need for considering long-term implications. “Even if this works in the short term under the incumbent Government, it is difficult to be certain that future governments will follow the same principles and continue to align with its initial objectives.”
According to Prof. Dunusinghe, this remains a significant challenge, given Sri Lanka’s history of political appointments and mismanagement in SOEs and the subsequent risk that the same issues could persist with the holding company.
Profitability not the only goal
A key IMF official recently stated that it was possible for Sri Lanka to restructure its SOEs without resorting to privatisation, provided they are not a burden to the country’s tax payers or Government debts.
However, a major and recurring problem with SOEs, as noted by numerous stakeholders, is their tendency to operate at a loss. According to available data, Sri Lanka’s 52 key SOEs incurred cumulative losses of Rs. 744.6 billion in 2022. This translates to a burden of Rs. 1.7 million per registered taxpayer, Rs. 33,949 per citizen, and Rs. 141,809 per household.
Commenting on the need for fiscal discipline, Prof. Dunusinghe emphasised that losses should be avoided. However, he added that profitability alone should not be the primary goal of all SOEs.
For instance, State banks and other similar development entities were established to serve specific purposes to the public such as promoting development, addressing market failures, or fulfilling strategic objectives, as the private sector often does not supply enough in certain areas, especially in social services. Therefore, he remarked that these were not necessarily meant to serve the sole purpose of generating profits.
“While State banks like People’s Bank and the Bank of Ceylon must not operate at a loss, their role is to improve financial inclusion while contributing to the country’s development. Profit can be an outcome, but it should not be the goal. The idea that all SOEs must make a profit is misguided. However, they should not continue to be loss-making entities.”
Grounds for a strong monitoring mechanism
The IMF Governance Diagnostic Assessment (GDA) outlines the requirement for establishing a holding company, along with the passage of a modern law on SOEs that will drive comprehensive reforms of State enterprises, the management and governance of State enterprises, and the State’s portfolio of enterprises.
Further, the IMF GDA outlines: “It is essential that the holding company sets appropriate governance policies and performance-oriented governance arrangements for its subsidiaries but not engage in their operation. The holding company should be careful to avoid diluting the responsibility and accountability of the board and management of individual subsidiary SOEs to establish and maintain appropriate internal controls over finances and human resources.”
Discussing the potential benefits, Prof. Dunusinghe noted that a holding company would have to operate transparently while disclosing profits and losses, which would create a strong monitoring mechanism.
Accordingly, investors and the public would be able to hold the company accountable and any mismanagement would be reflected in the market. He explained that this was a far more effective form of oversight compared to the current system, where the Government’s monitoring and evaluation activities were often inadequate.
“I am uncertain as to what extent the Government is prepared to carry this out. There is pressure on the Government to act, but it remains to be seen how soon this will be initiated and implemented. Many details are still unclear. For instance, which SOEs will be included in the holding company? Will it be limited to commercial entities, or will it include other entities as well? These questions need to be addressed,” he said.
Prof. Dunusinghe added that if the Government wished to retain ownership of these enterprises, it must drastically improve financial transparency and management.
Likely to improve transparency, profitability
One key aspect for successful restructuring, as recently highlighted by the IMF, is increasing SOE transparency, particularly by publishing audited financial statements of the key SOEs in a timely manner. Sri Lanka has a total of 527 SOEs, with 52 identified as key.
According to data available on the Ministry of Finance website, among the 52 key SOEs, only 10 annual reports/financial statements for 2024 were listed under the Department of Public Enterprises as of 6 March, and the majority of those listed remain unaudited. While all 52 key SOEs presented annual reports/financial statements for 2023, many remain unaudited.
It was also reported in early 2024 that only 11 of the 52 SOEs had published financial data up to 2022. Further, the last available annual report is from 2022. These issues highlight the need for increased financial accountability from SOEs moving forward in order to break the pattern of past losses.
Commenting on the implications of a holding company, Advocata Institute Chief Executive Officer (CEO) Dhananath Fernando, whose organisation is a key institute in SOE reform advocacy, noted that the proposal for a holding company was a welcome suggestion in the Budget.
He stated that, overall, a holding company would likely improve transparency, as appointments would be conducted by the board of directors with transparent financial statements, which could translate into profitability.
“While this is a decision in the right direction, the challenge will be bringing all entities under such a model and acquiring due financial reports,” he noted.
Regarding the potential timeline for implementation, Fernando noted that since a holding company had been suggested by previous IMF reports and had been due in 2024, it was currently at the bill stage and must be tabled in Parliament for further discussion. Accordingly, the legislation must first come into place, followed by execution. Therefore, according to Fernando, it is possible for the Government to take up the proposal this year.
Addressing potential models for SOEs, Fernando noted that privatisation was a more favourable option.
“Unless necessary, the Government should not be in business, given that an adequate private sector exists for this purpose. Therefore, privatisation is a more favourable option in most instances, except where it is not viable. Other models, such as Public-Private Partnerships (PPPs) and mergers, can also be considered,” he said.
Avoiding bureaucratic layers
The IMF GDA highlights that the success of the holding company model will depend upon the effectiveness of its governance and is not without risk. It further notes that a poorly structured and governed holding company risks adding another layer of bureaucracy to SOE governance, further diminishing transparency and accountability.
Commenting on the risk of such bureaucratic red tape, Prof. Dunusinghe noted that the establishment of a holding company could potentially reduce bureaucratic layers if implemented properly.
He added that as privatisation and other arrangements involving SOEs often faced significant opposition, the idea of a holding company was favourable if implemented correctly and operated efficiently while avoiding the pitfalls seen before.
Fernando meanwhile noted that a holding company could add to existing bureaucracy if a non-intervention policy was not strictly enforced or adhered to. Conversely, such a policy would minimise its impact.
Further, University of Peradeniya Department of Economics and Statistics Professor H.M.W. Ariyarathna Herath noted that bureaucratic inefficiencies would persist if the Government retained exclusive control over SOE governance. He added that the governing body should therefore include representatives from diverse sectors, such as the private sector, academia, and other relevant stakeholders.
Structural reforms as an essential complement
Prof. Herath explained that a holding company or a centralised programme could be beneficial, as they would introduce necessary reforms to SOEs.
However, he emphasised the need for accompanying structural and systemic reforms in order to ensure that the reforms were effectively implemented and development was centralised. Given Sri Lanka’s lack of successful SOE models, Prof. Herath suggested studying similar programmes in regional states and adapting them to the Sri Lankan context.
He further identified inefficiencies and lack of productivity as the primary issues with SOEs, while highlighting that restructuring and structural reforms were essential to transform these enterprises into productive and efficiently-run entities.
He also addressed key factors contributing to these inefficiencies, citing the continuous recruitment of labour by successive governments. According to Prof. Herath, this practice has led to stagnant income structures, particularly since capacity in other areas has not kept pace with the increasing labour force. This has resulted in surplus labour that could otherwise be deployed for other productive activities within the country.