Financial Times

Corporate affairs
State ownership, privatisation and competencies
By Sunil Karunanayake
Our columnist analysis the role of state companies that have been privatized and says they have shown the way on how such loss-making institutions can be revived.

State owned enterprises (SOE’s) or public sector undertakings (PSU’s) are government owned companies or statutory corporations set up by an act of Parliament. They constitute an important segment of the economy and account for significant portion of the gross domestic capital formation. In the fifties and sixties globally to arrest market failures state sponsored enterprises were created.

Sri Lanka was no exception with pioneering efforts in cement, chemicals, ceramics and plywood being established. In the sixties further advancements were made in industries such steel, hardware, tyre etc to meet the needs of that period. This was followed by an era perhaps with political pressures and euphoric sentiments forcing the government to pursue a path of nationalization of private ventures in public transport (buses), port services, petroleum insurance and plantations to name a few.

The winds of globalization following the fall of the Berlin wall and the collapse of the Iron Curtain signaled a new era of world trade across the borders and deregulation expanding in great proportions. This provided lot of momentum to free private enterprise and most economies began to place faith in the private sector to generate economic surpluses to feed many mouths.

This trend continues to date with a gradual scaling down of the state ventures particularly those engaged in commercial ventures. Since the liberalization of the economy of Sri Lanka in 1977 all governments thereafter pursued this policy though at times not successfully but on the whole removing financial burdens on the tax payer. The governments went further to repeal the famous business Acquisition Act, which was used even to acquire businesses ranging from oxygen manufacturing plants to restaurants.

The principle of “governments must govern and regulate and the private sector should be the engine of growth” is now well established. Looking at Sri Lanka we can clearly see for ourselves the State Vs Private Sector by picking just a few examples -- Air Lanka, Plantations, Telecommunications, Insurance, Port Services to name a few.

The city of Colombo also offers two classic examples in the now dilapidated JEDB and former Shaw Wallace office buildings once the showpiece premises of Carsons and Shaw Wallace. It really reflects sheer neglect and lack of care usually associated with state ownership that emerged within the euphoric period of post nationalization era.

Many theories have been expressed on land reforms but anyone would agree an independent sovereign nation couldn’t forever live with vast extents of its principal agricultural crop being in the hands of foreigners. But the state ownership marked by a series of blunders by successive governments particularly in management and incompetent appointments caused irreparable damage.

During this period our competitors like Kenya seized the opportunity and built up a successful tea economy making heavy inroads into the lucrative UK market once the domain for Ceylon Teas, and now poses a major threat to Sri Lanka.

Vietnam and Indonesia are two other competitors who joined the fray in grabbing the market share out of Sri Lanka. Tea is a global product sold in a global market and hence its competitiveness through research and innovation is critically important, fortunately this industry is now showing signs of recovery under private management but faces an uphill task in regaining lost markets.

Today the telecommunication industry in Sri Lanka is growing rapidly and accounts for a major share of the service sector growth in the GDP acting as a major catalyst to industry and commerce. Telecommunication also plays a key role in developing IT facilities enabling the development of IT training centers and access to email and Internet in almost all parts of the country.
Even though government still partially owns Sri Lanka Telecom and plays a passive role the industry is well equipped today with active private sector participation and heavy investments in modern technology. With adequate and independent regulation privately owned key functions can be well managed as observed in Insurance and Telecommunication.

Not all activities in transforming economies can be privately owned and managed. A country cannot grow and transform without large and strategic state enterprises, for this purpose Sri Lanka has quite rightly set up an independent authority to manage strategic SOE’s like banks and energy sectors.

Losses resulting from incompetent and at times corrupt management could lead to state enterprises leaning on banks for survival. This vicious circle poses major fiscal and monetary problems for the state.

Leaving the vital SOE’s in the hands of party loyalists and friends without the required skill and experience and the added disadvantage of political bias in decisions will continue to burden poor people of this country already saddled with increasing taxes, utility costs, etc.

(The writer could be reached at - suvink@eureka.lk)

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