Here is the spoon, help yourself!
View(s):It would have been funny, if it wasn’t pathetic. You must have said so if you had noticed what was reported during the past few weeks about the management of our public enterprises – the businesses run by the government of Sri Lanka. Let me elaborate little bit of what appeared in our media, and then relate them to our economy and our living.
Whose dues?
The Ceylon Petroleum Corporation (CPC) had issued a warning to SriLankan Airlines: “if the dues to CPC for purchasing fuel are not paid, the fuel supply to Sri Lankan will be cut off.” SriLankan Airlines had been pumping fuel to its planes without paying and thus had accumulated dues to the CPC which was close to Rs. 13.45 billion (or Rs. 13,450 million).
The CPC had failed to pay VAT amounting to Rs. 1.5 billion. The Inland Revenue Department (IRD) had locked the bank accounts of the CPC for not paying VAT. As reported in the Sunday Times on July 1st, the CPC has to collect unpaid dues from various public enterprises amounting to Rs. 70 billion. SriLankan Airlines being only one of them.
The biggest unpaid dues are with the Ceylon Electricity Board (CEB). It has to pay Rs. 46 billion for its purchase of fuel without paying to the CPC. The warning was to be extended to the CEB as well.
Finally SriLankan Airlines agrees to pay Rs. 800 million by scraping its bottom. This is less than 6 per cent of its total dues to CPC. Then, the airline wants to get bank loans to pay the balance in installments.
Circular debts
Borrowing from banks is not a new thing for these public enterprises. Unlike for others’ loan applications, banks don’t evaluate their business performance and business plans. Banks don’t need to ask for collateral from public enterprises.
This is because in the first place, the biggest banks that are lending to them are also public enterprises: Bank of Ceylon and People’s Bank. Even if they are private banks, loans to public enterprises are guaranteed by the government so that the lending banks don’t need to worry about risky lending.
Why government? It is because the government plays a major role in vital business decisions of the public enterprises even if the government does not know any business! The government appoints the director board, recruit employees, take business decisions and, set the prices of the products.
So why worry for borrowing? Public enterprises keep borrowing from each other because none of these institutions are accountable for their borrowing or lending.
This wonderful financial arrangement of the public enterprises is called “circular debt” – state of borrowing from and lending to each other. However, the worry is that somebody has to be responsible for paying the circular debts at the end of the day; who would be that unfortunate victim?
Public enterprises:
how many?
Before we look for an answer to that question, let me brief you about some of the shocking information about Sri Lanka’s public enterprises. One of the weird questions that you can ask is that “how many public enterprises are there in Sri Lanka?” It is weird, because there is no answer to that question. Depending on the interpretation and the definition, the answer might change.
For instance, the Sri Lanka Transport Board is a public business enterprise, but Sri Lanka Railway is not an “enterprise” – it is a government department. But both of them deliver the same service – public transport.
According to the Annual Report 2017 of the Ministry of Finance, there are 400 public enterprises in Sri Lanka. The government has separated 55 out of this total as “strategically important” public business enterprises. The three enterprises that we talked about earlier – CPC, CEB and SriLankan Airlines – are all public business enterprises.
Losses of public enterprises
Public business enterprises are also known for their bad business performance, frequent losses and, accumulated bank debts. According to the Annual Report 2017 of the Ministry of Finance, average return to assets (ROA) of these enterprises is 0.64 – a gross indicator of the bad business performance.
The CPC – one of the biggest public enterprises in the country has an outstanding bank debt amounting to Rs. 338 billion. It has made a loss of Rs. 11 billion during the first four months of the year 2018, although there was a little profit of Rs. 3.5 billion in 2017. CEB, on the other hand, made Rs. 49 billion losses in 2017, and reported its accumulated bank debt amounting to Rs. 24 billion.
SriLankan Airlines, since it was taken over from the Emirates by the government 10 years ago has been continuously making losses, in spite of lower fuel prices in the past few years. Its accumulated losses now amount to Rs. 169 billion, while the losses last year alone accounted for Rs. 29 billion.
Perks from losses
It does not matter for the enterprise itself, even if they make losses. The vital business decisions are made outside the enterprise by the government. Apart from that the losses are also covered by the government’s annual budget. So why worry about losses, for which the enterprises themselves are not directly responsible for or accountable for?
For this reason, the management of the public enterprises does not have to perform well enough in order to pay not only the salaries and allowances, but also annual bonuses from (negative) profits. It was reported that even the personal PAYE tax of the employees is paid by not the employees, but the enterprise!
Minister’s perks
While trade unions can also help themselves, the politicians can also have their share as well. No wonder many politicians love to be not just the Members of Parliament, but the Ministers who hold the authority over public enterprises. We must appreciate that we have 400+ public enterprises to support a large number of ministries and ministerial portfolios!
They can also recruit the employees of the public enterprises from their own electorates. Whether they know the subject or not, and competent for the job or not, are unnecessary questions for the management. Parliament has passed long ago the necessary regulations preventing recruitment of the bulk of public enterprise employees outside the Minister’s purview.
Because the employees are from the Minister’s village area, they have to go home on Friday and come back on Monday, leaving only three days a week for effectively working at the office. We have adequate number of days of leave per year and holidays to accommodate such practices.
After all, the real authority of the employees is not the Chief Executive Officer (CEO) of the public enterprise – whichever the term you use for that position, but someone outside the enterprise. If anything goes wrong, the rescue operations will be launched by the trade unions.
Who is the victim?
After all, somebody has to pay for all that. It is the people of the country and, each individual. The losses of the public enterprises are passed on to people so that part of the tax that people pay should be spent to cover the losses and to pay for the perks.
The loans keep getting accumulated so that, at the end of the day, they also have to be taken care of by the people; the people must pay more taxes in the future to pay off these loans.
Most of the public enterprises are “strategic sectors” of the economy as they provide inputs and infrastructure services. The price and the quality of their services, therefore, determine the “competitiveness” of our economy. If we don’t compete in our economic activities, our investment expansion, export performance and, economic growth all get affected by the bad performance of our public enterprises. Therefore, finally it is our forgone development which everybody has to share.
It is not necessarily the ownership that matters; after all it is the “business model” that we have introduced to our public enterprises.
(The writer is a Professor of Economics at the Colombo University. He can be reached at sirimal@econ.cmb.ac.lk).