Financial Times

Reforming the Ceylon Electricity Board

By Charitha P. de Silva

Trade unions are once again vehemently objecting to the proposed new reforms at the CEB.
As a nominee of the Ceylon Chamber of Commerce in the Monitoring and Advisory Committee (MAC) of the Ministry of Power and Energy, in 2003/2004, I was perturbed, but not surprised, to read of the Unions’ objections. I consider it a great pity that our President has let himself be intimidated by the JVP and JHU into turning against all public sector reform on the basis that any or all such reform is some type of privatization and therefore anathema.

Fortunately he is no longer dependent on the JVP and JHU for his political survival, and should therefore be able to re-evaluate the position. He will then recognize that privatisation may well be very necessary in the case of 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.

One of them is the CEB. The Monitoring and Advisory Committee led by Ranel Wijesinha (himself a nominee of the Institute of Chartered Accountants and who was nominated as Chairman by the committee and not through any political appointment by the Minister or otherwise), 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 of electricity. We in the MAC were successful in developing a composition for 7-8 independent boards and the carefully selected 50 -60 nominee directors were all accepted by the then Minister just before the government changed, and all the good work done until then abandoned.
I think it is appropriate for me to dispel, at this point, some of the myths and fallacies about privatisation that have been acidulously 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 quite 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 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.

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 salaries 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 your performance and the rewards you receive. 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 difference 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. Very little can be expected of an SOE that is privatized but maintains its public sector character. If the Chairman of the newly privatised company is a political stooge, and the board is packed with political appointees, very little will change. Implacable enemies of privatization such as dyed-in-the-wool Marxists cannot be persuaded by reasoned arguments. They are ideologues and one 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 telecommunication sector. When it was a government monopoly we had to wait 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 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 harder.

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.
The recent judgments of the Supreme Court have startled (and greatly heartened) the public. This is all to the good. However there is a great danger that these judgments 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 recent furore about the reform of the CEB. It is inexplicable why the Minister-in-charge need be intimidated by the opposition of the union.

Does he not realize that the de-regulation of the telecom industry was also (like very other privatization) opposed by the relevant union? Does he not appreciate that that particular de-regulation that was unmarred by corruption was a huge success from which the general public benefited? Does he not realize that the number of members of the union that opposes the reform of the CEB is limited to a few thousands, which is miniscule in comparison to the millions of members of the public that would benefit?

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