Restructuring loss-making SOEs for economic survival | Sunday Observer

Restructuring loss-making SOEs for economic survival

14 May, 2023

The plight of State-Owned Enterprises (SOEs) has been in hot discussion for many years due to the significant burden they have placed on the Sri Lankan economy because of their persistent losses and financial difficulties. The losses of SOEs have been consistently financed through Government subsidies, loans, and equity injections, resulting in a significant drain on public finances.

The Government has estimated that the losses incurred by SOEs will amount to approximately 0.6 percent of GDP in 2020, which is a considerable amount considering the country’s economic situation. Moreover, the Government has highlighted that this burden could be even greater if the contingent liabilities of SOEs, such as their outstanding debt obligations, are considered.

Sri Lanka is in an extremely undesirable position, and the policymakers are facing a gruesome challenge currently as the country is experiencing its worst economic crisis since independence.

Sri Lanka has formally defaulted on its public debt, which amounts to more than 100 percent of GDP and is mostly denominated in US dollars. The country is facing a severe foreign exchange shortage, leading to a number of issues with the import of essential commodities.

The only positive news in the recent past was the release of the first quota of the International Monetary Fund’s extended facility. Even the receipt of EFF can solve only a fraction of the prevailing problems, although it has given the country considerable breathing room, particularly with regard to the staggering foreign debts.

Sri Lanka has over 500 SOEs, of which 55 are classified as strategically important and are said to have recruited over 10 percent of the total public sector workforce.

Gigantic losses

The irony is that the financial data of the vast majority of such institutions is not available to the public. Institutions such as the Sri Lankan Airlines, the Petroleum Corporation, the Ceylon Electricity Board, and Sri Lanka Railways, notably, have been making gigantic losses in billions of rupees during the past few decades.

The burden of loss-making SOEs on the Sri Lankan economy is multifaceted. Primarily, it affects the country’s fiscal sustainability by putting pressure on the government’s budget. The Government must allocate significant amounts of resources to keep SOEs afloat, diverting funds from other priority areas such as education, health, and infrastructure development.

Secondly, SOEs’ losses affect the country’s external finances by increasing the demand for foreign currency to finance their operations. This demand for foreign currency can lead to pressure on the exchange rate, making imports more expensive and increasing the cost of living for the general public.

Also, the gross inefficiency of SOEs hampers economic growth and development by reducing productivity and competitiveness. SOEs that operate in sectors such as energy, transport, and infrastructure play a critical role in the country’s economic situation.

The inefficiency of these SOEs can lead to higher costs for businesses, hindering their ability to compete in domestic and international markets.

Successive governments

Although currently people blame the Gotabaya Rajapaksa regime for the prevailing economic malaise, the root cause runs much deeper, and successive governments are responsible for the dire situation.

It is unfortunate that traditionally, a faction of Sri Lankan politicians creates suspicion among the general public about foreign direct investments. Whenever there is a proposal from a foreign investor, these dubious political elements come up with some type of slogan to disrupt proceedings, regardless of the long- or short-term benefits to the citizenry. The country lost billions of dollars’ worth of investments due to the opposition of trade unions and political parties linked to socialist ideologies.

There are several issues with the structure of Sri Lanka’s State-Owned Enterprises. SOE labour expenses in Sri Lanka are said to be approximately over 70 percent higher than those of private enterprises, according to available data, due to unwarranted waste.

Also, the labour productivity of SOEs has been steadily declining over the last decade. Internal audits and financial openness are lacking, lowering the motivation to perform effectively. There are allegations that the funds allocated for some of the SOEs are being mismanaged or abused to suit the whims and fancies of politicians, predominantly for political campaigns.

SOEs suffer significant challenges due to mismanagement, corruption, and overstaffing. Even though there is a faction of dedicated State sector workers, political meddling can spoil even such honest workers. Political henchmen are frequently granted employment, even when there is no real necessity for recruitment.

Another cause of loss-making is SOEs subsidising their products, with multiple institutions absorbing the expense. For example, the CEB borrows its requirements from the Petroleum Corporation without any pragmatic plan of paying them back.

The ultimatum is that both institutions will miserably fail to earn at least the cost. Customarily, the Government keeps pumping funds to keep them afloat by utilising the hard-earned tax revenues. Until recently, the electricity, water, and other tariffs had not been revised in years, mainly due to political reasons. This merely leads to higher budget deficits, which leads to increased debt or more money printing.

Anyone can wonder whether these SOEs were originally set up in a way that led to failure. Evidently, there are no budgetary constraints or controls, and the Treasury’s support has kept them afloat over the years despite any losses they have made. Many SOEs also borrow from the two State-owned banks, Bank of Ceylon and Peoples Bank, for day-to-day operations.

The unpleasant practice of appointing a new management after a regime change, which has prevailed for decades whenever the ruling power changes hands, has been another key cause for the failure of SOEs. Due to political pressure, the country has witnessed the heads of SOEs change even during a five-year period of governance. Most often, the key positions are not filled on merit but on the basis of political favoritism. In contrast, almost 100 percent of the time, the private sector appoints decision-makers based on experience and qualifications through a proper recruiting process.

If the IMF-backed restructuring or privatisation plans of the incumbent Government takes place, the currently loss-making institutions may become leaner and more efficient. However, an extremely effective strategy must be deployed to educate and motivate the existing staff members, perhaps with emphatic incentives.

The most prominent example that can be cited is the successful privatisation of Sri Lanka Telecom (SLT) in 1997. It was an enormous challenge at the time, with vehement protests and opposition from trade unions. However, the then authorities managed to defuse such resistance by utilising the correct strategies, whereby the transition took place smoothly. The workers were adequately incentivised by offering collective ownership.

Private sector

The management of SLT was handed over to the private sector, which led to perfect efficiency. Since then, SLT has not only provided an exemplary service to its customers but has also made billions of dollars in profits year after year. Also, competition was created by inviting other private sector operators into the industry, and that led to more competitive service delivery to the customers.

However, the Government must consider the restructuring of these SOEs after a proper analysis considering the benefits to the country. The citizenry also must be made aware of these benefits and opportunities through a systematic and transparent process. In this context, the lesser involvement of politicians is crucial, as most of the public does not trust them.

It is a proven fact that throughout the world, privatisation or restructuring loss-making businesses increases competitiveness and innovative capacity in the market. When a business is funded by the State, a little space is given to innovate as such institutions are protected by the Government. Public opinion is that most of the SOEs must be privatised to obtain better service for them.

It is a fact that failing SOEs must be restructured or privatised to ensure efficient, transparent, accountable, and effective operation. At this crucial point in time, not only the Government but also the entire citizenry must make certain sacrifices to come out of the existing deep pit.

The country cannot afford the colossal losses made by a few institutions that are maintained by the people who pay direct and indirect taxes any longer.