Sri Lanka currently operates over 527 State-Owned Enterprises (SOEs) across various sectors, with 52 identified as strategically important to the economy. Historically, concerns regarding the transparency of financial reporting and the overall performance of these SOEs have been recognised as key issues affecting the economy.
As part of the International Monetary Fund (IMF) programme, Sri Lanka committed to structural reforms and improving financial viability of SOEs. With the next tranche approaching, experts indicate that some progress has been made in this regard, particularly in areas concerning reporting and transparency.
Progress in curtailing corruption in SOEs
Speaking to The Sunday Morning, University of Ruhuna Department of Economics Senior Lecturer Dr. C. Gunasinghe said that the current administration appeared more focused on controlling the misuse of public funds and emergency purchases, which significantly burdened the public.
He noted the introduction of proper procurement processes and more transparent procedures, especially under the digital economy strategies, as positive steps.
Dr. Gunasinghe also emphasised the progress made in efforts to curtail corruption and bribery, particularly concerning investigations. He noted that these actions demonstrated to the public that public money had been utilised effectively, in line with IMF recommendations.
Addressing what more could be done, he stressed that cost minimisation should be effectively introduced and competitiveness must be maintained, with the effectiveness and implementation of resources kept at optimum levels.
Given that several SOEs operate at a substantial cost to the Treasury, he also noted the IMF’s recommendation to implement a cost-adjusted formula to reduce the burden on the Treasury and, ultimately, on the public.
Holding company draft bill as a positive step
A key Budget 2025 proposal introduced on SOEs is the establishment of a holding company to improve SOE governance. It 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, as also suggested by the IMF.
Addressing the drafted bill on the holding company, which is currently under review, Advocata Institute Chief Executive Officer (CEO) Dhananath Fernando explained that if the Government successfully implemented the reforms and the holding company structure, it would indicate an improved stage compared to before.
However, he noted that some divestiture must be undertaken if politically feasible. He also emphasised the need for a clear and proper holding company act and for it to duly gain parliamentary approval.
Fernando added that for SOEs, especially the key ones, progress should be viewed beyond mere profits and losses, and that broader reforms needed to be considered.
More progress required
During the most recent IMF staff visit to Sri Lanka, IMF Mission Chief for Sri Lanka Evan Papageorgiou highlighted that upcoming bills on public-private partnerships, SOEs, public procurement, and public asset management should be consistent with the Public Financial Management Act and best practices.
The Public Financial Management Act No.44 of 2024 is designed to strengthen the management and control of public funds, promoting transparency, accountability, and efficiency. It establishes a framework for budgeting, revenue collection, expenditure management, and fiscal reporting, aiming to improve macroeconomic management and fiscal policy.
Hence, it is especially notable that the Ministry of Finance has published annual reports/financial statements of 52 key SOEs, with 22 SOEs showcasing audited financial statements for 2024 as of now. Seven SOEs have unaudited financial statements remaining for 2023.
Speaking to The Sunday Morning, Verité Research Lead Economist Raj Prabu Rajakulendran observed that far more progress was required. However, he acknowledged the publication of annual reports for the key SOEs as a positive step.
“Out of the key 52 strategic SOEs, only eight lacked any form of financial statements in 2024, and most of them have records up to 2024. This is considerable progress, especially considering the situation 4-5 years back. However, in terms of steps to reform SOEs, not much has been made public yet to assess effectively,” he said.
According to Rajakulendran, what needs to be done moving forward boils down to political will. He explained that certain amendments were possible with the IMF programme, while some conditions were set in stone. SOE reforms, therefore, can be worked with.
Hence, he noted that the mere fact that these were IMF recommendations did not suggest that they would be implemented. It is the political will that should exist, and the IMF programme is simply a nudging mechanism.
Certain positive steps apparent
The IMF Executive Board, when completing the Fourth Review, highlighted the SOE restructuring programme as a crucial element of the overall economic reform effort.
Accordingly, given the extremely challenging fiscal conditions, the Government has no space to provide transfers to fund SOE losses any longer; ideally, the Government should receive more tax revenues or dividends from such enterprises in the hands of more efficient management.
The IMF Governance Diagnostic Assessment (GDA) outlines 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.
According to available data, the 52 key SOEs accounted for a loss of Rs. 744.6 billion in 2022, translating to a burden of Rs. 1.7 million per registered taxpayer, Rs. 33,949 per citizen, and Rs. 141,809 per household.
Meanwhile, speaking to The Sunday Morning, Frontier Research Senior Research Lead Arshad Ismail observed visible progress in the Government’s SOE reforms, particularly concerning the Ceylon Electricity Board (CEB) and Ceylon Petroleum Corporation (CPC), based on the latest IMF report and apparent developments.
He explained that both entities had now incorporated the repayment of legacy debts into their pricing formulas. Specifically, the CPC is utilising a small margin in fuel pricing to repay its debt, while the CEB’s older debt has been factored into electricity tariffs from June onwards.
Ismail identified these as positive steps, at least regarding financial viability. He also observed certain developments with SriLankan Airlines, noting that a medium-term strategy was being finalised to help restore operational stability and address its debt.
He also highlighted the publication of annual reports and financial statements as a step towards progress.
“Apart from this, the Government has committed to a broader set of reforms under the IMF programme. It is working on appointing independent and qualified board members to major SOEs and ensuring that all 52 major SOEs publish their audited financial reports. However, some of them still have not been published,” he added.
Ismail further noted the drafting of a new SOE law with World Bank input to improve transparency. He also pointed out that the Government had pledged to limit foreign borrowing by SOEs unless it was for clearly viable, foreign exchange-generating projects.
Hence, he stated that the conditions currently appeared promising and were driven by IMF requirements.
“Historically, reform efforts have struggled due to political issues, union resistance, and general governance gaps. Therefore, the Government is doing more than before and demonstrating intent. However, I am uncertain whether it is adequate, and determining this will depend on how consistently it follows through, especially on the tougher, politically sensitive reforms. The real test will be adhering to these commitments even when resistance begins,” he added.
Govt. commitment
The Ministry of Finance recently announced the initiation of a new legislative framework aimed at improving the performance and accountability of SOEs in the country. This is to provide a clear legal structure to ensure SOEs can contribute to the national economy in an efficient and productive manner.
According to Treasury Secretary Dr. Harshana Suriyapperuma, one key reason for the inefficiency and poor quality of services in SOEs has been the lack of a proper legal framework under previous governments. Hence, this act is intended to enable SOEs to operate profitably.
Moreover, according to the latest IMF document, the Government has committed to continue reforms on SOEs, including settlement of legacy debts and limiting foreign borrowing.
Out of the CPC’s financial obligations of $ 251 million, $ 146 million remains to be repaid. Meanwhile, Rs. 180 billion of CEB debt as of 2024 is included in the tariff calculations at present. The Government has committed to resolving these debt issues in a timely manner.
Other Government measures to strengthen SOE governance and improve their financial transparency include clarifying the mandates of key SOEs through Statements of Corporate Intent and holding their management accountable for delivering satisfactory results informed by Key Performance Indicators (KPIs).
Several attempts made by The Sunday Morning to speak to Deputy Minister of Economic Development Anil Jayantha Fernando; Minister of Industry and Entrepreneurship Development Sunil Handunnetti; Minister of Trade, Commerce, Food Security, and Cooperative Development Wasantha Samarasinghe; and Treasury officials were unsuccessful.