The conditions are ideal for a critical re-examination of some of the shibboleths that were foisted on us by the “Mahinda Chinthanaya”. One of the most fallacious (and damaging) was that privatisation was not the answer to any of our economic problems. There is a good chance that our present leaders will pay heed to [...]

Sunday Times 2

Reforming the Ceylon Electricity Board

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The conditions are ideal for a critical re-examination of some of the shibboleths that were foisted on us by the “Mahinda Chinthanaya”. One of the most fallacious (and damaging) was that privatisation was not the answer to any of our economic problems. There is a good chance that our present leaders will pay heed to my message as they are not demagogues or ideologues, unlike the leaders of the previous regime. They may recognize that it is necessary to privatise certain State Owned Enterprises (SOE’s) that are dragging down the economy by incurring huge losses while not even having the justification of providing excellent service to the public.

These companies to be established under provisions of the Companies Act, which as the Electricity Reforms Act of 2002 specifically provided for, were not to be subject to privatization (unless by approval of Parliament).

One of them is the CEB. Way back in 2008 the Monitoring and Advisory Committee (MAC) led by Ranel Wijesinha (himself a nominee of the Institute of Chartered Accountants) was statutorily tasked with identifying and recommending over 50-60 directors for 7-8 unbundled successor companies. These companies to be established under provisions of the Companies Act, which as the Electricity Reforms Act of 2002 specifically provided for, were not to be subject to privatization (unless by approval of Parliament). The major intended reforms consisted of unbundling of its three main activities, generation, transmission and distribution. We in the MAC were successful in developing a composition for 7-8 independent boards and the carefully selected 50-60 nominee directors who were all accepted by the then Minister just before the government changed; and all the good work done until then was abandoned.

I think it is appropriate for me to dispel, at this point, some of the myths and fallacies about privatisation that have been vigorously propagated by ideologues. It has been recognized the world over, except in bastions of Marxism like Cuba (consequently one of the poorest countries in the world) that government is less adept at running businesses than the private sector. In our case it has become evident that government is incapable of running a business efficiently. Excellent examples are the CEB and the Ceylon Petroleum Corporation.

Let it be understood straight away that this is not due to inherent incompetence on the part of public sector managers or employees. It is due to the very nature of the SOE system. Public sector managers are answerable not to shareholders or stakeholders such as banks, but to their political masters. The General Manager and the Board of Directors are almost always political appointees beholden to Ministers and other politicians. These ministers and politicians look upon the SOE that they control as a source of perks and power. When they are not extracting some benefit from the SOE they find it useful as an institution where they can give jobs to their relatives and friends. Every SOE is a cow to be milked.

Apart from that there is no motivation to work diligently in an SOE. There are no rewards for meritorious performance in the form of extra payments and wages and rapid promotions in the public sector because of the rigidities that prevail there. The system does not encourage SOE’s to attempt to annually evaluate the performance of individuals as happens in the private sector. Bonuses in the public sector are uniform. In the private sector there is an immediate correlation between one’s performance and the rewards one receives. This makes for a huge difference in the levels of motivation in the two sectors.

Apart from all this, there is the difference that every employee of a listed company in the private sector can become a shareholder and share in the profits and accumulation of wealth that success brings. These property rights are the essential differences in the performance of the two sectors. Nobody working for an SOE feels any sense of ownership. Many years ago when the Employees Trust Fund was established the proponents of the scheme actually believed (and loudly proclaimed) that workers who contributed to the fund would have a sense of ownership of the companies that the fund invested in, and would therefore work harder. That delusion did not last long.

For all these reasons, privatization has been a major success worldwide -provided the management of the SOE becomes truly private. I cannot over-emphasise that the essence of privatisation is the transfer of the management from the public sector to the private sector. It is not the transfer of ownership which may or may not take place. Very little can be expected of an SOE that is privatized but maintains its public sector character in its management. If the Chairman of the newly privatised company is a political stooge, and the board is packed with political appointees, very little will change and privatization will fail.

Implacable enemies of privatization such as dyed-in-the-wool Marxists cannot be persuaded by reasoned arguments. They are ideologues and we should not waste time trying to persuade them. But the people of this country, the citizens, should look around and see what a success some privatizations have been. Look at the telecommunications sector. When it was a government monopoly we had to wait for years to get a telephone line unless we were prepared to pay substantial bribes. Today every man in the street has a mobile phone and companies are vying vigorously with each other to give citizens a better deal. That is what competition does. We owe that particular privatization to the courage of President Chandrika.

Another excellent example of successful privatisation is insurance that was at one time a government monopoly and therefore moribund. Today companies are falling over each other to offer the customer a better deal and the industry itself is thriving.
We must all be aware that proposals to privatize an SOE will be opposed by three groups. The trade unions will inevitably oppose it because they will lose the opportunities that are there for their members to rob the enterprise because of the laxity of the controls, and the lack of concern of the managers. They will also fear that the discipline that prevails in private sector establishments will compel their members to work more diligently.

The other group that will oppose the privatization of the SOE are the senior managers who will inevitably suffer a diminution in power and influence. The opposition from the managers will usually be covert, because they would not like to be seen to be in opposition to government policy.

The third group that will oppose it will be the politicians presently involved in the SOE, because they too will lose power and influence. They too would tend to be covert in their opposition. The group that will benefit from privatization will be the people of the country who will be the customers. This group is larger in numbers, by far, so that it is a mystery why our leaders are hesitant to privatize when every economic consideration demands it. The leadership should realize that for every single vociferous ‘hostile’ there are a thousand silent voters who will benefit. Every privatization will be a political triumph – if it is properly done.

Here is the rub. Because of the inherent dishonesty of politicians and their lackeys in the public and private sectors, some privatisations have been manipulated to benefit a few corrupt individuals. Judgements of the Supreme Court concerning certain privatizations some years ago startled (and greatly heartened) the public. That was all to the good. However there is a great danger that these judgements will be used by leftist ideologues and other opponents of privatisation such as trade unions to denigrate the very process of privatisation itself. Witness the furore in 2008 about the proposed reform of the CEB. The minister in charge of the CEB should not be intimidated by the inevitable opposition from the union.

He should realize that the de-regulation of the Telecom industry was also (like every other privatization) opposed by the relevant union? He should realise that that particular de-regulation which was unmarred by corruption was a huge success from which the general public benefited? He should realize that the number of members of the union that opposes the reform of the CEB would be limited to a few thousands, which is miniscule in comparison to the millions of members of the public that would benefit. Why should a vociferous minority be allowed to obstruct progress? Can the minister not figure out that reform will be a resounding political success? Should he not have the judgment and courage to grasp the nettle?

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