Experimenting with State-Owned Enterprises

by Neville Ladduwahetty

The total number of Sri Lanka’s State-Owned Enterprises (SOEs) is reported to be 527. Of these, 55 are categorized as strategically important. According to Public Finance Data and Analysis, only 11 out of 52 SOEs have Published Financial Data up to 2022.  Consequently, except for the common knowledge that the overwhelming majority of SOEs are loss making institutions, no one has a clue as to the extent of the cumulative losses incurred, nor the number employed by the SOEs.

Against this background, the public has raised concern about the privatization of the SOEs, especially the strategically important ones. The government has appointed Suresh Shah as the Head of State-Owned Enterprises Restructuring Unit (SOERU) to review and address issues relating to SOEs.

During a seminar held at the Organization of Professional Associations (OPA), Shah reportedly said: ‘To ensure transparency and effective management, the draft legislation is based on nine guiding principles stipulated in the Cabinet-approved SOE reform policy, covering board appointments, policies, financial aspects and others.  Around 85 SOEs have been identified as commercial entities, out of 138 considered’.

What happens to the rest? According to Shah ‘A key highlight of the upcoming legislation is to bring SOEs under a Holding Company (HoCo) which would drive comprehensive reforms of state enterprises, the management and governance of state enterprises, and state’s portfolio of enterprises. The proposed HoCo is modelled after Singapore’s Temasek.  However, it would take time and effort for this entity to evolve into modern day Temasek’ (Mirror Business, February 02, 2024).

HISTORY of Sri LANKA’s SOEs

Since Independence, the public has heard ad nauseam, words such as “transparency and effective management”.  Some include “accountability” as well. The fact that the draft legislation is based on “nine guiding principles” is no assurance that the HoCo would be free to live by them without interference of one kind or another. Before addressing reforms, it is necessary to understand WHY SOEs are in the state they are in today.

SOEs are used as vehicles to practise unabated nepotism that permits the appointment of the kith and kin of politicians to the Boards of SOEs and to give employment to political loyalists for favours done during elections.  Consequently, most SOEs are compelled to carry the baggage of incompetent managers who are clueless to manage a bloated workforce. It is this reality that makes SOEs loss-making institutions from the very outset. Even profit making SOEs have to cater to the behest of their political masters.

For instance, SriLankan Airlines, which was a profitable institution under an effective management, began to incur losses after the removal of key personnel because they opted to cater to the obligations of their customers in preference to the convenience of those who appointed them. Similarly, the Chairman of SLT, who ran that institution profitably, was removed, without any explanation, and a new board appointed. A request was made to them to withdraw the case they had filed against the proposed merger between Dialog Axiata and Airtel. The refusal to oblige resulted in the board being asked to resign. A new board has now been appointed.

This is the culture in which the HoCo with its ‘nine guiding principles stipulated in the Cabinet approved SOE reform policy’ would have to operate. It is a far cry from the culture in Singapore, where Temasek operates. Does the fact that only around 85 have been identified as commercial entities mean that the remaining 442, out of the total of 527 SOEs, are allowed to hang out to dry as loss-making entities because the prospect of their survival under the HoCo is remote.

Therefore, instead of limiting the scope to SOEs with commercial value, a serious attempt should be made by the SOERU to develop a strategy to make the SOEs a collective mix of profitable and loss-making entities for the service they provide so that taken as a collective, SOEs are not a burden to the State. Instead of such an approach, the objective of the SOERU appears to be to identify those that could be attractive to the private sector because of their commercial value.

In this regard, policies adopted by the private actor could go beyond the limits of commercial valuations, to others, such as Security. For instance, the attempt to sell the government’s share in Sri Lanka Telecom to either of the two shortlisted companies of Indian and Chinese origins may not only have foreign policy implications but also cause security concerns as well.

PROPOSED REFORMS for SOEs

In addition to the intended reforms proposed by SOERU at the OPA seminar, the Secretary to the Ministry of Finance has said that one of the key legislations the government is working on relates to the SOE reform Bill. What is interesting is that both the Secretary and the SOERU representative emphasised the importance of transparent procedures in the selection of Members to the Boards of SOEs.  While it is indeed heartening to hear the importance given to transparency in selecting Board Members with the right credentials, history tells us that however right the credentials are, there is no guarantee that the policies they opt for would turn out to be relevant to meet the ever-changing challenges.

Instances of this kind of mismatch abound. We have had individuals with outstanding credentials in economics who advocated lowering taxes and printing money with consequences, the likes of which Sri Lanka had not experienced. Perhaps, their policies may have been right under different circumstances, but they certainly did not prove right for the economic circumstances Sri Lanka was in when they were proposed. There were others who advocated banning the import of chemical fertiliser and replacing it with compost.

They did not realise that the high yield seed paddy that was used by the farmers not only increased their incomes but also enabled the State to feed the nation which depended on the use of chemical fertiliser. Furthermore, a fact recognised by agricultural research scientists is that high yield seed paddy is not compatible with compost because of low yields. Another is the instance where a highly placed bureaucrat advocated the import of urea because it was cheaper than producing it locally, and called for the dismantling and selling the urea plant. Soon afterwards, the sale prices of imported urea increased.

PROPOSED STRATEGY

The lesson to be learnt from the few experiences cited above is that while it is important to select the right Members for the Boards of SOEs, it is equally or even more important that they adopt the right policies. Since the reason for the failure of most SOEs is fundamentally one of poor or bad management resulting from the reasons cited above, it is absolutely vital that each SOE operates under agreed guidelines that are monitored regularly by the Oversight Committees of Parliament. Furthermore, since policies need to change with changing circumstances and challenges, structural arrangements that permit regular reviews are an absolute necessity.

The following procedures are recommended to ensure that each of the 527 SOEs function and perform under the close scrutiny of Parliament:

* NO SOE should be privatised, whether they have commercial value or not.  85 of the SOEs with commercial value are invariably located on prime land. Privatising such SOEs would tempt investors to sell such lands and gain healthy returns with no regard to the contributions made to the state from their operations and the personnel employed by them.

* Each SOE should be assigned to a particular Oversight Committee of Parliament.

* Each Oversight Committee should call upon SOEs assigned to them to submit a comprehensive Policy Statement with the participation of the workforce outlining the strategies they plan to adopt to realise their objectives.

*  These policy statements should be reviewed by each Oversight Committee, with the assistance of experts in the related fields, and a mutually acceptable consensus reached with each SOE, which then would become the Operating Guidelines for each SOE.

·  The performance of each SOE should be reviewed by the respective Oversight Committee at regular intervals to evaluate performance and accountability.

CONCLUSION

It is reported that the government appointed State-Owner Enterprises Restructuring Unit (SOERU) is preparing legislation to address issues relating to the existing 527 SOEs. In the meantime, the Ministry of Finance is also engaged in a State-owned enterprises reform Bill.     This combined effort to reform SOEs is because over the years they have become a serious financial liability to the State.

According to the SOERU, of the 138 SOEs considered, 85 have been identified as commercial entities and plans are for 17 to be formally wound down.  Presumably, out of the 527 total SOEs and the 85 identified as commercial entities, the remaining 442 SOEs (less the 17 to be wound down) would have to function under forthcoming legislation that includes a Holding Company (HoCo) that would be modelled after Singapore’s Temasek, notwithstanding the cultural and historical disparity that exists between the two countries.

The need to reform SOEs so that they could be made to function as financially viable entities and in the process for them to make a positive contribution towards serving the interests of the State and provide gainful employment to thousands is long overdue. However, if the intended reforms are to have a positive impact, the reformers should acknowledge that the reason for the dire state of most SOEs today is because they have been made dysfunctional by the practices adopted by successive governments.

Judging from the sketchy media reports, the focus of the reforms appears to be on ‘transparent mechanisms to appoint board members to SOEs and put an end to the current tradition of political appointments’. Even if reforms ensure that appointments to the boards of SOEs are free of politics, it is a combination of effective boards backed by sound policies that make institutions viable and effective. Therefore, the drafts of policies developed by boards should be vetted by the workforce since the success of policies depends on their commitment to the implementation of the policy.

The draft policies developed by each SOE should be reviewed by the Parliamentary Oversight Committee and consensus reached so that such policies become the Operating Guidelines against which each SOE is regularly assessed in respect of its operations. Since policies are not static, regular reviews by Oversight Committees would enable policies to be modified to meet ever changing challenges.

What is of concern is the government’s intent to privatise most of the 85 SOEs that have commercial value regardless of whether they are profit-making or not. Since most of the SOEs are located on prime State Lands, privatising them would mean transferring state assets to private companies. Such an outcome may even amount to winding down some SOEs to the detriment of those currently employed.

The need to privatise key SOEs has arisen because successive governments have made them loss-making or less effective by resorting to practices in violation of “immutable republican principles of REPRESENTATIVE DEMOCRACY”. This makes it obligatory for the incumbent government to honour their pledge to the people and seek their approval at a referendum before disposing of assets.