The formation of a holding company titled ‘National Enterprises Authority’ to manage five loss-making State-Owned Business Enterprises (SOBEs) including SriLankan Airlines has been recommended at the highest levels of government. These SOBEs are to undergo structural changes in their operations in line with the modern practices and market requirements, according to the Guidelines on Corporate [...]

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Five loss-making SOBEs to undergo structural changes

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The formation of a holding company titled ‘National Enterprises Authority’ to manage five loss-making State-Owned Business Enterprises (SOBEs) including SriLankan Airlines has been recommended at the highest levels of government.

These SOBEs are to undergo structural changes in their operations in line with the modern practices and market requirements, according to the Guidelines on Corporate Governance issued by the Finance Ministry’s Public Enterprises Department (PED).

This report has recommended to the Treasury to suspend government assistance to five of the 527 SOBEs – SriLankan Airlines, Ceylon Electricity Board, Ceylon Petroleum Corporation (CPC), National Water Supply and Drainage Board and Sri Lanka Transport Board – and to restructure those institutions.

Many SOBEs are showing minimal performance in terms of its efficiency and profitability with 83 per cent of its profits being generated by just six entities while 97 per cent of losses were generated by five entities during 2020, latest Finance Ministry data show.

Therefore, owing to a poor performance and deteriorating balance sheets of these five key SOBEs at the start of the pandemic, it has further aggravated the economic and fiscal costs of COVID-19 for the country.

It is important to broad-base the entrepreneurial sector which will in turn increase total national proceeds or total sum of sales while restoring confidence of donor countries and agencies, a senior Finance Ministry official disclosed.

It has also proposed to repeal all Acts of Parliament that established the SOBEs and they be re-incorporated under the Companies Act. This would place these five enterprises under a new governance regime immediately. Citing an example, he noted that CPC should be transferred from the CPC Act (No.28 of 1961) and be incorporated under the Companies Act.

The defining characteristic of this proposal is to establish a distinct legal structure where the government can retain ownership through a sovereign share class while ensuring a minimum level of good governance required under the Companies Act.

In 2020, banks provided credit facilities amounting to Rs. 920 billion to the 52 SOBEs and Treasury assistance given to SOBEs was at Rs. 75 billion, Finance Ministry data showed.

According to Corporate Governance Guidelines, SOBE reforms range from performance management, improving composition of director boards, strengthening regulatory authorities, listing on the capital market and establishing a holding company for these five enterprises as an initial step.

At present 287 SOEs are under the purview of the PED, while the Department of National Budget oversees the remainder.

52 SOBEs have been identified as key enterprises in the Annual report of Ministry of Finance.

As per the latest available data, 25 of the 52 key SOBEs identified by Ministry of Finance do not have financial information available online after the 2017 Annual Report.

Furthermore, 11 of the 52 SOBEs have recorded negative Retained Earnings/Accumulated Losses as per the latest available financial data.

The PED has been monitoring the performance of SOBEs and it has been observed that over the years that the governance structure of almost all SOBEs requires to be restructured, regardless of whether they are commercially oriented or not.

It is in this context, that the Guidelines on Corporate Governance and Operational Manual for SOEs have been drafted to provide SOBEs with the necessary direction to organise its operations.

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