In moving ahead with State-Owned Enterprise (SOE) reforms, under-performing and parallel institutions are to be shut down or amalgamated. However, the funding already allocated to these SOEs remains a significant concern.
In a recent televised interview, President Anura Kumara Dissanayake addressed concerns related to the State sector and productivity, stating that restructuring would be undertaken. He noted that certain institutions that served a purpose at their inception no longer did so.
Referring to certain SOEs as examples, he stated that such entities lacking a purpose at present would be shut down. He also noted that instances where multiple institutions served the same purpose would result in amalgamation.
Regarding the number of SOEs that will be shut down under the reform programme and the funding allocated to them, The Sunday Morning learns from a Deputy Secretary to the Treasury that the SOE reforms are yet to be finalised.
“The Treasury is currently involved in this process and Cabinet approval has been obtained to review the potential pathways for finalising these matters,” they said.
It was also noted that to date, funds requested by SOEs had been allocated using existing modalities, without any changes. However, in line with the current Government’s clear policy regarding loss-making and fiscally burdensome SOEs, the Treasury is maintaining close attention on these entities, as well as paths for revenue enhancement.
Accordingly, a comprehensive review is currently underway, and it is anticipated that from 2026 onwards, with the preparation of a fiscal framework, these matters will be treated with further vital emphasis.
In recent SOE reform developments, the Cabinet of Ministers has granted its policy approval for the State-Owned Commercial Enterprises Management Bill prepared in order to introduce a new legal framework for the proper management and maintenance of SOEs.
This bill introduces a new legal framework for the proper management and maintenance of SOEs, which will enable these entities to be completely void of political influence and to appoint professionals with expertise in their fields to their boards of directors with professional qualifications.
Moreover, the Government has decided to carry out reforms in the sector, including the divestiture of selected SOEs to enhance competitiveness, productivity, and efficiency across the economy, and to assist in the country’s socio-economic development and fiscal consolidation efforts.
Attempts by The Sunday Morning to contact the Deputy Ministers of Finance and the Minister of Industry and Entrepreneurship Development regarding the details of the proposed reforms were unsuccessful.
Identification of non-performing entities required
University of Peradeniya (UOP) Professor in Economics Ananda Jayawickreme noted that in the event under-performing SOEs were to be shut down, the investments and funding already allocated to them were significant concerns.
According to him, effectively observing and identifying redundant SOEs is key to moving forward, which requires a comprehensive assessment. He added that if non-performing entities existed, they could be discontinued while reallocating resources, workforce, and infrastructure to other sectors.
He explained that the analysis of redundancy needed to be based on the type of service these SOEs had provided. If any activity can generate profits, it should not be considered redundant. Certain entities may not have direct production or output. However, whatever service provided should be carefully evaluated based on the country’s needs.
Prof. Jayawickreme further noted that the SOE sector had been undergoing continuous transformations and reforms. The primary focus is generally on loss-making enterprises, especially in line with International Monetary Fund (IMF) recommendations to reduce incentives and subsidies provided to the SOE sector.
“From a fiscal sustainability perspective, it is important to ensure that SOEs operate at least at the break-even point, generating sufficient revenue to cover costs.
“SOEs are often natural monopolies. Management inefficiencies, overstaffing, and mismanagement of funds are among the key concerns within SOEs. Additionally, high borrowing rates lead to substantial interest payments and debt repayment burdens,” he said.
He noted that the Government’s options were either to continue running SOEs as Government entities, striving for them to operate at least at the break-even point under a different framework and improved management system, while undertaking necessary reforms, particularly regarding cost control, wastage reduction, and the elimination of unnecessary spending, or to consider privatisation.
He explained that as SOEs were essentially natural monopolies, simply privatising them could be detrimental to consumer welfare. In natural monopolies, the unit cost continuously decreases, regardless of the output level.
Privatisation would incentivise the new owners to maximise profits by increasing output. Therefore, these enterprises should ideally be retained as natural monopolies, given that the Government’s focus is primarily on social welfare rather than profit maximisation.
Prof. Jayawickreme also outlined other options that could be considered in SOE reforms, saying: “It is possible to establish an entity to manage all SOEs, similar to what Singapore has done, including SOEs that are highly profitable and those that are not. This approach facilitates the management of the total budget.
“Rather than assessing each SOE individually, combining high-profit and low-profit entities allows for a balanced overall financial outcome. The overarching objective is to improve the performance of all SOEs.”
SOE reforms crucial
Speaking to The Sunday Morning, Advocata Institute Chief Executive Officer (CEO) Dhananath Fernando explained that the reform of SOEs was crucial. He noted that if non-performing SOEs were identified, shutting down appeared to be a solution, following careful evaluation.
Similarly, merging institutions where redundancies exist will yield cost savings and allow for the reallocation of resources to areas where they are needed.
Fernando noted that based on structures discussed regarding this, the initial step should involve unbundling certain SOEs and cultivating greater private sector participation, avoiding blanket solutions applicable to all, since while some SOEs would require regulatory oversight, others could be readily closed down.
However, according to Fernando, a significant challenge would lie in addressing employment and human resource concerns arising from such reforms, which must be carefully considered.
Various mechanisms, such as mergers, management audits, and the identification of critical talent might be necessary in these situations. He noted that initially, non-strategic SOEs, particularly smaller ones generating minimal revenue, could be examined.
A recommendation from the IMF Governance Diagnostic Report is the establishment of a holding company with its own board of directors, under which all SOEs would be consolidated. Fernando acknowledged this option, although Sri Lanka is late in implementation, noting that a holding company could make decisions regarding measures such as divestment and the implementation of strong governance structures.
He further emphasised that SOE reform was essential for future progress, adding that continuation should take place alongside political capital, as failure to do so could lead to political instability due to tensions surrounding domestic politics.
Furthermore, according to Fernando, the problem of SOEs extends beyond merely financing SOEs, as maintaining a level playing field is a crucial concern and not maintaining one would lead to losing tax revenue from the private sector.
“Favouring State-owned commercial enterprises negatively impacts the profitability of private companies and results in a loss of State revenue due to the absence of a fair competitive environment. The Government should not engage in any commercial enterprises, as its primary focus should be good governance, a function that cannot be undertaken by the private sector,” he said.
Proposals signal decisive action on SOE problem
Meanwhile, Frontier Research Head of Macroeconomic Advisory Chayu Damsinghe noted that the proposed amalgamations or shutdowns indicated a notable consideration of SOEs by the Government, suggesting the Government’s intention to reduce a portion of governmental wastage and progress in that direction.
However, adequate emphasis should also be placed on more significant SOE problems, such as those with substantial losses or negative impacts and numerous enterprises being established under the same subject.
Damsinghe explained that the actual cost implications from these changes to small enterprises might not be substantial, especially considering the Government’s current fiscal position, which has been relatively strong. Beyond any direct financial impacts, it signals the Government’s acknowledgment of a significant public concern.
“Meanwhile, what is truly important is to examine SOEs of much larger scale that have a significant impact on the country’s financial position. This is where concerns such as financial cost, cost reflexivity, and opportunity cost play out on a large scale, such as with SriLankan Airlines,” he pointed out.
Commenting on the Government’s stance on restructuring, Damsinghe noted that financially, large SOEs could not be easily managed and their financial struggles remained complex.
He noted that previous attempts at privatising SriLankan Airlines had been unsuccessful partly due to financial issues, among other factors. Dealing with restructuring and the associated costs on the current balance sheet, future revenue projections, and the volatile global situation are significant concerns in undertaking these measures.
Damsinghe further explained that in terms of specific steps required at this stage, regardless of whether the ultimate goal was privatisation or not, addressing the balance sheet problems was crucial.
“The shutting down of an institution depends on its specific activities, operational methods, and even the influence of political factors. Therefore, it is difficult to adopt a blanket stance on this decision, as it is a complex process. Consequently, the Government can adopt a phased, pragmatic approach and also communicate its decisions clearly,” he stressed.