The Good of Privatization of State Enterprises to Foreign Companies
Posted on April 7th, 2023

Dilrook Kannangara

Selling state enterprises is not the right thing to do. If Sweden, Singapore and even Sri Lanka before 1972 could do it, state business undertakings can profit and run efficiently. However, the current state of affairs surrounding state businesses is pathetic and they cannot be salvaged. On top of that Sri Lanka is in a continuing economic downward trend for the fourth year running. Sri Lanka declared its inability to repay loans on April 12, 2022. Under these circumstances the options are very limited. IMF or not Sri Lanka has to sell off government business undertakings to foreign investors just to survive economically. Otherwise it will be a total economic and societal collapse and a foreign takeover of the nation.

All countries other than Cuba and North Korea invite foreign investors. Even developed countries and their geopolitical rivals like China, Russia and India encourage foreign investors. Sri Lanka cannot be the exception.

Combined losses of all loss-making State Owned Enterprises exceed the total government education and healthcare allocation combined! This is a terminal economic illness affecting Sri Lanka.

A comparison of foreign direct investments as a percentage of GDP (for comparison) in Sri Lanka and India shows where Sri Lanka went wrong. Until 2005 (inclusive) Sri Lanka received more foreign direct investments as a percentage of GDP than India. However, since 2006 every year India beat Sri Lanka in receiving more foreign direct investments than Sri Lanka.

What’s worse is that since 2012 Sri Lanka’s loss has been India’s gain in this regard. India performs exceptionally well economically despite massive challenges. It is mostly due to foreign investments. Most surprising is the fact that India closed its doors to foreign investors until the collapse of the Soviet Union whereas Sri Lanka opened its doors since 1977. Still, India has come a long way in overtaking Sri Lanka in receiving more foreign investments than Sri Lanka in comparative terms (and of course in real terms too).

Sri Lanka has mostly positive outcomes from foreign investors.

There are various levels of foreign investments. One is where the foreign investor outright purchases an entity wholly or in part with management control. The other is when a foreign investor enters into joint ventures with local companies. Another is when foreign investors buy shares of local companies traded in the Colombo Stock Exchange. All three forms are important and essential for Sri Lanka. The most controversial has been the first type. However, Sri Lanka’s experience in this regard has been mostly positive.

A host of state entities were sold (wholly or partly) to foreign investors in the 1980s and early 1990s. They have performed very well. They have employed a large number of locals, paid their taxes (after the tax concession period ended), made donations and sponsorships to locals, made additional investments in these ventures and removed the state burden of investment, management and running losses. Some of them include United Motors Lanka Limited, Buhari Hotels Limited, Ceylon Cold Stores Limited, The National Milk Board, Dankotuwa Porcelain, Pugoda Textile Mills, Thulhiriya Textile Mills, Distilleries Corporation of Sri Lanka, Oils and Fats Corporation, Tyre Corporation, Veyangoda Textile Mills, Leather products Corporation, State Hardware Corporation.

A few of them have scaled down their business due to global business reasons. These would have prevailed irrespective of the ownership. They handled these very well without burdening taxpayers and without trapping Sri Lanka in a debt trap.

However, large government corporates resisted privatization. Some of them were privatized in the late 1990s with remarkable outcomes. There was a time when Sri Lankans had to wait for a decade or more to get a telephone connection. With the sale of a majority stake in SLT in the 1990s the Japanese investor revolutionized Sri Lanka’s telecommunications sector. It was turned highly profitable and private and business customers massively benefited from new deregulation and efficiency that came with it. Without this foreign investment, Sri Lanka would have languished in extreme backwardness. Foreign investors did wonders to Sri Lanka’s mobile phone and internet market.

Privatization of Lanka Gas was another epic win for Sri Lanka. That too totally upgraded the gas sector in the island despite many allegations of price hikes, etc. Had it been in government ownership, global price hikes would have resulted in national bankruptcy as the government would have yielded into public pressure to keep prices low and borrowed foreign loans to pay for the difference. That would have landed Sri Lanka in the current mess in the 1990s. Later the gas industry underwent radical change with local and government business entities taking back from the foreign investor as a commercial transaction (not nationalization). Building local business acumen and resilience is another success story of privatization.

Though blamed for price hikes on privatization, there was nothing unusual. Sri Lanka’s gas prices still remained lowest in the region as price increases were driven by global price changes.

Privatization of Srilankan Airlines was yet another success story. Not only did that relieve the government of losses and the burden of investments, it also earned a profit for the government! Srilankan Airlines rose the ranks in the quality of service under the foreign investor. The biggest benefit came in 2001 when Tamil terrorists destroyed most of its fleet. Unknown to most, Srilankan Airlines bounced back within a year without any government burden! In wide contrast, the same airline is making massive losses since the government took it back over and the now forgotten Mihin Air (another government business venture) failed leaving massive losses for taxpayers to pay.

Under the foreign investor, ticket cost did not increase compared to other airlines providing similar service. In fact, it reduced as economies of scale were obtained. Since the government taking over their tickets are over-priced compared to other regional airlines.

In conclusion, while turning around government owned businesses by restructuring while keeping government ownership is preferred, it has always failed in Sri Lanka, and the ongoing economic crises make it impossible to restructure them. Privatization, especially selling off to foreign investors, remains the only economic way out for Sri Lanka. As the saying goes, beggars can’t be choosers. Those who trapped Sri Lanka into this desperate corner are responsible for eliminating options for the nation. If the only available option is not taken, the nation will go bankrupt resulting in civil war and disintegration. Sri Lanka will be unable even to purchase weapons and fuel for military vehicles. Those who think military might can survive without economic might are still living in the 15th century, on the verge of another foreign takeover.

Leave a Reply

You must be logged in to post a comment.



Copyright © 2023 All Rights Reserved. Powered by Wordpress