SOEs: Bleeding money
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Some years ago during the tenure of the Yahapalanaya (Good Governance) regime, a Business Times poll on the future of SriLankan Airlines drew the attention of the government. The poll found a majority of Sri Lankans saying the debt-ridden national carrier should remain in state hands and not privatised. Some ministers supported the poll’s contention that while the airline should be restructured to reduce its debt, it should remain under state control.That situation, however, has changed drastically because state organisations are plagued by debt and the government is unable to bear the financial burden any longer.
The national carrier is bleeding money, not at the moment though, as it says it hasn’t borrowed a cent from government coffers in the past 12 months. However, its accumulated debt largely due to the state’s financial handouts is enormous and recorded at Rs. 171 billion in 2021/22, according to an official report.
These thoughts crossed my mind after the President’s statement at the recent Advocata conference titled ‘Let’s Reset Sri Lanka’ where he referred to the state’s dilemma over State-Owned Enterprises (SOEs) and called for their restructuring. Restructuring of SOEs is an old record being played by successive governments without any success. The common theme is for a private-public partnership and there are a few examples of success in this area: More on this later.
As I reflected on these issues, I was drawn to a conversation at the gate where the trio was bargaining with Aldoris, the choon-paan karaya. “Oyata den santhosha-athi indana polim adu wela thiyena hinda (You must be happy that the fuel queues have reduced),” said Kussi Amma Sera, directing the query to Aldoris.
“Ow, hari amarui wishwasa karanna ehemai kiyala. Mama hithuwa polim mulu avuruddema thiyewi kiyala (Yes, it’s hard to believe that this is happening. I thought queues would continue throughout the year),” he said.
“Gas polima adu wela nathnam naththatama ne (The queue for LP gas has either reduced or there are no more queues),” noted Serapina, showering praise on the authorities for reducing the burden of the people, in reality a problem that could have been avoided with better management of the depleted dollar reserves.
“Polim adu wela eth viduli balaye mila godak ihala gihin. Jeevana viyadamath ihala naginawa ho gala. Mama danne nae duppath pavul kohoma jeevath wenawada kiyala (The queues may have reduced but with a sharp increase in electricity rates the cost of living is soaring. I don’t know how poor families are managing),” added Mabel Rasthiyadu.
At this moment, the phone in the sitting room rang. It was ‘Human resource’ pundit HR Perera, popularly known as HR, who also likes to discuss general economic issues – whenever he has the time.
“The President seems to be taking up the issue of SOEs seriously. But this is an issue – on its loss-making and need for restructuring – that has dogged Sri Lanka for many years. No one seems to take the responsibility of cutting the losses of SOEs,” he said.
“That’s because cutting losses means laying off workers and that – to many governments – is deemed unwise and results in a loss of votes at the next election. These institutions are consistently filled with political appointees – soon after an election – who are deadweights and bring no value to these organisations,” I said.
“But these are sucking up government funds and taxpayers’ money. This is one of the reasons for the current economic crisis as the government is printing money to pay for uneconomic assets like this and the public – through taxes – has to face the brunt of these unwise decisions,” he said.
As we discussed a plethora of other economic issues, the conversation ended on the promise of meeting for a coffee in the coming weeks, though face-to-face meetings once again seem inadvisable due to a resurgence of the COVID-19 pandemic.
According to officials, the Ceylon Electricity Board (CEB) had sought a 229 per cent increase in electricity rates but was approved only 75 per cent by the regulator. The new rates were effective from August 10. The huge rate increase is not surprising as the CEB hasn’t increased rates for at least eight years while its overheads keep mounting.
According to the Treasury, during the first four months of 2022, the key 52 SOEs reported a significant loss of Rs. 859 billion.
The biggest loser was the Ceylon Petroleum Corporation (CPC), largely due to the depreciation of the rupee against the US dollar, with the exchange loss estimated at Rs. 549 billion in the first four months of 2022. The loss at the CEB in the first four months of this year was Rs. 236 billion.
Some past regimes deserve credit in going ahead and restructuring once- unviable state assets like the plantations and the Telecommunications Department. The restructuring of these institutions, in public-private partnerships, has steadied the ship and made them viable. Sri Lanka Telecom (SLT) is churning profits under its 51 per cent (state) and 49 per cent (Malaysia company) partnership and in the first half of 2022 reported a 19.8 per cent increase in profit before tax (PBT) at Rs. 7.2 billion, compared to the same period last year.
Similarly regional plantation companies – in which the Treasury has a minor share and is a successor to state plantations’ organisations – have reaped many benefits including profitability and guiding tea prices to their highest levels. They are making money apart from the last few years owing to the absence of fertiliser and glyphosate due to ad hoc government policy.
If these two institutions – telecommunication and plantations – remained under state control, the losses today would be enormous. These are good examples of privatisation under public-private partnerships.
Then take the case of the Lanka Indian Oil Corporation (LIOC) which represents 10 per cent of the fuel distribution in the country and now has received approval to install another 50 sheds. Its revenues and profits have been increasing notwithstanding high fuel prices. On the other hand, the CPC is reporting huge losses. Doesn’t make any sense in keeping the CPC in state hands if the taxpayer has to bear the burden of injecting money into losing units.
Everyone including the International Monetary Fund is urging that these state institutions be sold or restructured with limited state control. This is a huge burden on the exchequer. However, it’s often the political question – and not economic viability – that ruling parties are confronted with when dealing with these issues.
As I wound up my column on this bright Thursday morning, my reflections are on the need for the rulers to make use of a golden opportunity of an all-party government or all-party governance and reach a consensus to restructure SOEs which could eventually transform to what SLT and the plantations are today.
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