Financial Times

Sathosa privatisation: Bad management, not political interference
By Quintus Perera
The giant consumer goods retailer, Sathosa or Co-operative Wholesale Establishment (CWE) is dying and gasping for breath symbolizing one of the major private sector failures after divesture from government control.

Efforts to revive it by the state are unlikely to work. "I don't think it could be revived under state control. The whole purpose in handing it over to the private sector was because of political interference and not bad management under the state," said a former senior CWE official with many years of experience in the state agency's wholesale and retail business.

"Reviving it under state control will only help ministers and other government higher-ups to use it as an employment tool for election favours." Can Sathosa Retail be revived? "That's a tough call. Maybe one should have tried out the exercise prior to privatisation where employees of the Welisara outlet managed the store and shared profits," the former officer said.

Here are his views on the failure of the state supermarket chain under private management: Before the divesture in 2002, it was operating at an average monthly turnover of a massive Rs 600 million in 155 retail outlets spread all over the country and was running at a profit.

Many of the top managers were given lesser responsibilities and their decision-making powers taken away by the International Grocers' Alliance (IGA) consortium that ran it after privatisation.

There was lack of transparency in the sale of the Sathosa Retail Ltd and in restructuring CWE outside the Public Enterprises Restructuring Commission structure.

All governments should be blamed for the deterioration of the CWE. A major portion of the accumulated debts was due to bad political decisions. Politicization of every activity of the institution was the norm. The current management failed to identify a proper product mix for the different outlets.

The management has requested a sum of Rs 300 million to refurbish and relocate the outlets. This would have been a waste with the inefficiency the company has shown now.

The CWE had a monopoly in distributing many essential food commodities and the income generated by these activities were utilized to maintain the retail network. It also served as wholesale go-downs. The branch managers were expected to canvass orders from local co-operatives, government organizations, schools and private dealers in the areas on quantity discounts.

The turnover from wholesale trading which was around 80 percent of the total turnover of the CWE in the 1980s gradually fell below 40 percent due to trade liberalization. The entire restructuring exercise of CWE wholesale marketing division, sports goods division, stationary division and hardware division collapsed due to no takers.

CWE's strongest attributes such as stores environment, service of the staff, merchandising was not as strong as when it was under the private sector. Activities such as direct imports of goods at lower prices, local purchasing of agricultural products from the farm gate enabled the prices to be kept low.

100 items such milk foods, canned fish tea, cooking oils, exercise books and even essentials like dhal, rice chillie, sugar were sold under the CWE brand name.

The cooking oils were imported in bulk and bottled under the brand name. A special brand of tea was blended. CWE brand rice milled at the two mills belonging to the institution was a big draw but now the two mills have been closed down. Family packs of more than one kilo and up to 5 kilos of rice, dhal sugar, etc were marketed at discounted prices. Competitors at that time were unable to match CWE prices.

CWE's efforts were to stabilize market prices of food items to the people and not to create market distortions. However socio-political needs sometimes compelled items to be sold at below cost thereby creating market distortions and losses to CWE.

A private company handling the logistics of Sathosa Retail tried to introduce a fully automated computer distribution system but the staff doing the distributing at this company had no knowledge whatsoever of the different needs of consumers, in different geographic areas. As a result the supply system went haywire.

Items such as imported breakfast cereals, canned fruits and up market products were distributed to far away retail shops in remote areas ignoring the variations of customer needs from location to location. Though the distribution was fully automated with a high tech computer network it failed and the logistics company abandoned the task, resulting in the company reverting to the old manual system.

There were no proper procedures for purchasing with little transparency in procurement procedures even though the government still holds 60 percent of its share capital. Purchasing of millions of rupees worth of items were left in the hands of one individual which would have resulted in inefficiency and corruption. Further, monitoring the performances of each shop doesn't appear to have happened.

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