“The biggest problem is not to let people accept new ideas, but to let them forget the old ones.” – John Maynard Keynes
“A basic principle of modern state capitalism is that costs and risks are socialised to the extent possible, while profit is privatised.” –Noam Chomsky
International Monetary Fund (IMF)’s staff report on Sri Lanka released in March, 2022 states: “The economic outlook is constrained by Sri Lanka’s debt overhang as well as persistently large fiscal and balance-of-payments financing needs.
Gross Domestic Product (GDP) growth is projected to be negatively affected by the impact of the Foreign Exchange (FX) shortage and macroeconomic imbalances on economic activities and business confidence.”
IMF Executive Board Assessment said the urgency of implementing a credible and coherent strategy to restore macroeconomic stability and debt sustainability, while protecting vulnerable groups and reducing poverty through strengthened, well-targeted social safety nets.
Directors also encouraged the authorities to raise income tax and VAT rates while minimising exemptions, to reform State Owned Enterprises (SOEs) and adopt cost-recovery energy pricing.
They also called on the authorities to gradually unwind Capital Flow Management (CFM) measures specifically mentioning the importance of prudent management of the Colombo Port City project with continued efforts to strengthen governance and fight corruption.
Their recommendations include statements such as: “Renewed efforts are needed on growth-enhancing structural reforms, including increasing female labour force participation, reducing youth unemployment, liberalising trade, developing a wide-reaching and coherent investment promotion strategy, and reforming price controls and State-Owned Enterprises (SOEs).
Efforts to strengthen governance and reduce corruption vulnerabilities should continue.” It is interesting to see the specific details the
Consumers
Directors have gone into in statements such as: “Unless international fuel prices and energy generation costs are passed through to consumers, the Ceylon Petroleum Corporation (CPC) and the Ceylon Electricity Board (CEB) are likely to incur further operational losses.
SriLankan Airlines, already in distress before the pandemic, was hit hard by the pandemic and is in need of regular transfers from the Government.
It will most likely also need support to service its Eurobond (US $175million) maturing in 2024.” There is a separate annexure on the Colombo Port City in this IMF report which lays out conditions for proper management of the project.
It says: “Stronger transparency requirements would help alleviate Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) concerns associated with offshore financial services.
Elaborating on AML/CFT concerns the report goes on to say: “Full compliance with international standards on reporting, supervision, bank secrecy, and beneficial ownership, and customer due diligence requirements would help mitigate risks of illicit financial flows through the Port City.
The current AML/CFT legal framework in Sri Lanka is expected to be applicable to the new offshore banks/financial institutions. As such, the Financial Intelligence Unit’s AML/CFT responsibilities should extend to offshore financial services in the Port City and adequate due diligence checks should be carried out on all prospective offshore financial institutions, especially those that originate from higher risk jurisdictions.”
In simple language they are telling the authorities to stop stealing from the project and hiding the money in countries with bad reputations of harbouring such black money.
Though it may not be easy for lay people to understand most of the jargon in such reports if one tries to put these into simple terms one would see that there are no new concepts or innovative ideas in it. It is just telling the authorities to be ethical and honest in their decision making and maintain the transparency.
It basically says that mismanagement of Government funds, ill-advised tax cuts and uncontrollable corruption are the main reasons for the current situation of the country, which a lot of people have been saying for years anyway.
At times it looks like a report card given to an unruly class in an elementary school by a Zonal Director of the Department of Education advising not only the students but also the Principal and the staff. True patriots among us, people who genuinely love this country, would most probably feel ashamed of our inability to find people with higher ethical and moral standards to govern our country.
Simple meaning of cost cutting strategies such as “reforming State-Owned Enterprises (SOEs)” is privatisation. SOEs are typically viewed as overextended and poor performers.
World Bank studies show that SOEs in developing countries accounted for a substantial portion of the outstanding domestic debt and foreign borrowing. About 3000 public enterprises have been privatised in more than 60 developing countries in a 5 – 6-year span from the late 80s to early 90s.
Limited
Though privatisation has often been tried in developing countries, especially during financial crises, it is not a concept limited to such situations and/or countries. Developed economies have also opted to privatise certain State-run establishments including utilities using appropriate mechanisms addressing the rights of all the citizens to have access to their basic needs at an affordable price.
What most proponents of privatisation do not try to analyse is the root causes for the failure of SOEs and the success of the Privately-Owned Enterprises (POEs).
Though the success or failure of POEs is mainly measured through their profits and losses, it may not be the only criteria to judge the performance of SOEs. Many of the SOEs are established for the purpose of providing public goods and services and not necessarily within a profit maximisation framework.
One of the reasons for less than satisfactory efficiency and productivity levels in SOEs is the high operational cost due to overstaffing the organisation with unqualified or underqualified incompetent people.
Some of the SOEs in Sri Lanka, as well as in many other developing countries, are used as POEs of the politicians in charge of the relevant line ministries to accommodate his/her supporters requests for employment.
The very first action of the politician is to appoint a Chairperson/CEO/Director/Vice-Chancellor and a Board of Directors from the pool of his relatives/friends/supporters to make sure that they will follow his orders/requests without questioning their negative effects, if any, on the establishment.
They then strengthened their loyalty to the politician by filling the vacancies, in some cases even by creating vacancies, using the lists provided by the politician. Such recruits are chosen to perform the desired tasks based on the fancies of the political establishment rather than based on the desired outcomes of the establishment or the needs of the country at the time.
Private sector of developing countries cannot be compared with that of developed countries since the market conditions are worlds-apart, both literally and figuratively.
Studies done by funding agencies such as the IMF, World Bank, and the Asian Development Bank (ADB) have documented both these phenomena, SOEs functioning as POEs of politicians and POEs functioning as SOEs where the profits such POEs make are mainly due to Government contracts they receive through their political connections.
More often than not, such contracts are awarded to the companies run by relatives or friends of the politician or to the ones either willing to pay the commission the politician is asking for or have made sizable contributions to the political campaign.
These private companies then optimise their profits by getting as much public money as possible from the treasury and delivering an end-product at the lowest quality with the lowest cost.
In the process of cutting the labour costs such POEs also resort to hiring unqualified/under qualified incompetent people at lower salaries. For all practical purposes such POEs function very much like the typical SOEs in these countries.
Studies show that the countries where the State has effective powers to regulate have relatively well working public sectors. Interestingly, the private sectors of those countries also work well.
Deterioration
Conversely, the private sectors of the countries with poorly performing public sectors, have also shown performances of similar standards as their governments. The main reason for the public sector of a country to fail, is the deterioration of the value system of the people in that country. If the majority of the people in the country are corrupt then irrespective of whether they are connected to the public or private sector the country cannot be developed.
The writer has served in the higher education sector as an academic over twenty years in the USA and fifteen years in Sri Lanka and he can be contacted at [email protected]