State owned enterprises (SOEs), numbering 287 as per the Public Enterprises Department, (exact number is contradictory: as per Mid-Year Fiscal Position Report - 2019 issued by the Minister of Finance, there are 422) in Sri Lanka are those institutions in which the State exerts control through full ownership. Many of these institutions existed for a considerable period of time in the country.
In many other countries, both developed and developing, SOEs make a significant contribution to economic growth. Search results revealed that SOE contribution to gross GDP accounts for approximately 30% in China, 38% in Vietnam, 25% in India and Thailand, and 40% and over in many Central Asian countries. The presence of State Owned Enterprises in rapidly developing countries such as China, the UAE, Russia, and Indonesia are significantly effective. However, SOE contribution to GDP in Sri Lanka stood at 13.3% in 2018 as per the Department of Public Enterprises.
As in other countries, SOEs are different from private enterprises as they are often financed by public funds and also provided much more favourable conditions than private sector entities. In turn, they are expected to provide essential goods and services to the public. In Sri Lanka, a vast majority of these SOEs are capable of providing such public services while making reasonable profit to self fund and ease the burden of State coffers. Regrettably, this did not take place during the past several decades.
As per available reports, the cumulative loss of these institutions stood at staggering amounts. The irony is that almost every one of these loss making institutions could have been making profits if not for the fact that consecutive governments totally neglected and sheltered many misdeeds, corruption, and misappropriation at these SOEs, largely for political gains. Over the years, as everyone knows, many of these enterprises were safe havens for political allies, usually of the ruling party.
While some of the public welfare subjects such as water supply, electricity and transport covered by the institutions can provide valuable and justifiable reasons, a majority of the others are expected to make profits on their own survival. Instead, these failed SOEs still operate with public funds, depriving the Government coffers of colossal sums of money.
However, for the very first time in recent history, in an extremely constructive and encouraging move, President Gotabaya Rajapaksa made a historic decision to appoint a high profile Selection Committee to pick Chairpersons and Board members for state owned commercial entities, statutory bodies and regulatory and promotional agencies. His sole intention was to break the past practice of appointing political henchmen to gain favours, often for monetary gains as well.
More importantly, the President encouraged this high powered committee to search private sector talents for the jobs. However, the process may be experiencing temporary minor setbacks due to the prevailing exceptional and unprecedented depression created by the Coronavirus pandemic. Nevertheless, the whole country is eager to see the revival of this process as early as possible.
Regulator
The role of the Government is to act as the regulator and the authoritarian, and as the owner of SOEs, the institutions and assets belong to them. The Government must have an efficient mechanism to monitor the activities of these SOEs in terms of administration and competitiveness. In addition, the Government is compelled to keep an eye on possible corruption, mismanagement and incompetence of the staff. The latter in particular, due to the disappointing performance of a majority of SOEs over the years costing the State a colossal amount of public funds.
The underperformance of SOEs drains out scarce resources belonging to the State and the public. It also can distort domestic financial markets, hampering private investments. Therefore, the present Government’s effort to reform the SOEs through qualified and experienced senior management with subject knowledge is laudable. They also sought to redirect the governance structure of these enterprises for enhanced effective functioning. The appointments made so far seems justifiable and the performance result is to be seen in just about a year.
As an example, the Government recently appointed a chairman with a proven track record and with all competencies of a business leader for ‘Laksathosa’, operating under the Cooperative Wholesale Establishment (CWE) and the Ministry of Industry and Commerce. The organisation consisting of 398 outlets and over 5,000 workforce is capable of not only meeting the challenge but also to beat any supermarket chain operating in Sri Lanka, in competition. The brand name established initially in 1949, backing of the Government, trust of the common public for price reasonability and the widespread and convenient locations of outlets is unbeatable criteria for a knowledgeable and skillful leadership. The selection committee trusted the appointee to transfer the organisation to an invincible outfit in retail trade. On a positive note, it is safe to say that already the country witnesses a significant change in the establishment.
Public utilities
Some of these institutions that are related to public utilities such as water supply, electricity, public transport and fuel supply, are not expected to be profitable and are justifiable to obtain Treasury assistance. These institutions which are exempted from profit making provide many of their products and essential services either free of charge or at subsidized rates to the public. However, the growing concern is not about them but about those SOEs which are making billions of unbearable losses year after year. As a bench mark, the Public Enterprises Department reported that the collective loss of 16 of the SOEs was 156.3 Billion in 2018.
Apart from privatisation, which is the best option as per this writer’s personal opinion, introducing other reforms by establishing more effective institutional framework is the only other workable option to improve SOE performance. Fortunately, as mentioned earlier, the Government has already commenced this process. If the President’s directive is successful in this regard, many of the loss making SOEs would get better in performance and relieve the Treasury from the burden of maintaining white elephants. Moneys saved from this can be utilised for public welfare.
However, the reforms must give a clear mandate and performance indicators with a set time frame to the management. Particularly, the political manipulation that was a clear hindrance in the past should be eliminated completely. These actions will help the Government to instil a performance based culture. This also will undoubtedly help manage the utilisation of capital and other resources which can be converted into profitability.
Irrespective of the current output, SOEs remain an important source of public service delivery, employment and socioeconomic development in Sri Lanka. Criteria such as mismanagement, political exploitations, corruption, lack of clear guidance has influenced the productive and efficient existence of these valuable institutions. Therefore, to improve performance, in addition to appointing the top management, the Government should at the outset ensure adequate freedom from red tape and politicisation for the implementation of the strategic management functions.
Secondly, the Government must table predetermined and quantifiable short term and long term goals to be achieved within a clear time frame. Anticipating that the appointed management is knowledgeable and competent, setting up goals will not be a daunting task. Finally, the management of each of these SOEs can develop an independent and transparent monitoring mechanism for the regulator to evaluate performance. They must chart clear and quantifiable short- and long term goals, and appoint autonomous and competent management to strategise how to achieve these goals.