Privatization of Public Enterprises.
Posted on April 17th, 2024

Sugath Kulatunga

A strident cry we hear now from goverment politicians and economic pundits is that State Owned Enterprises (SOEs) must be privatized to make them efficient and profitable and ease the burden of losses to the state. Majority of them think that a wave of the majic wand of privatization will turn the white elephants to cash cows. Historically in Sri Lanka, SOEs have made a significant contribution to industrial development, employment creation and providing essential services. Before 1977 many SOEs came into existence out of a nationalization wave born out of compulsions of state control or to fill a gap in the production of essential goods or services. Other than Corporations established under specific Acts, SOEs were formed under the Government Sponsored Corporations Act No. 19 of 1955 and the State Industrial Corporations Act No. 49 of 1957. As of now it is estimated that there are 527 SOEs.

Economic analysts presently take a more balanced view of its effectiveness (of privatization). Few dispute the positive results of privatization of firms operating in competitive, or potentially competitive markets, but experience has yielded a deeper understanding of the complexities of implementing the policy, especially in infrastructure sectors such as electricity, railways or water and sewerage, and particularly in lower-income, less developed economies. There is a greater recognition that privatization needs to take place in a supportive institutional and policy framework if it is to live up to its potential; and there is a better realization of the socio-political challenges that inevitably accompany this always contentious activity.

Privatization should not lead to monopolies and if it leads beyond the institutional and professional capacity of the private sector it will be counterproductive.

If some of the many SOEs which do not make an elemental contribution to the economy or provide an essential service, a selective and judicious privatization is justified. But when one looks at the past privatization episodes in Sri Lanka one shudder to think of the consequences. Privatization became a fetish during the JR regime on political grounds and more as an opportunity for politicians to enrich themselves and their henchman. A reputed economist and the head of the prestigious Institute of Policy Studies, late Dr. Saman Kelegama 2001 cites a case where in Sri Lanka an SOE valued at US $100 million was sold at only US $7 million on the ground that the government only wanted to get the privatization policy itself moving.” In many episodes the buyer of SOEs did not continue operating the SOE but sold the machinery for scrap like in the case of Kantale Sugar. A similar tragedy happened with the Werehara workshop of the CTB which was considered one of the best equipped and efficient workshops in South Asia. One cannot recall a single privatized SOE during this period operating more efficiently and profitably. Most of them are cannibalised or nonexistent. 

During the regime of Chandrika Bandaranayake Kumaratunga (CBK) selling of the family silver in the way of selling off SOEs was the easy way to balance the budget. Fortunately, the Supreme Court found that some of those deals in the sale of valuable national assets were illegal and restored them back to the State. In addition,CBK was fined and her accomplish the Secretary of Finance was banned from the public service. The bigger crime of the pair was the selling back to Prima Flour Mill for a pittance an asset that was to be handed over to Sri Lanka on the terms of the BOT agreement. As a result, the country has lost its grip on food security.

It cannot be denied that behind the economic rationale on privatization is a lurking ideological pollical obsession which prevents these advocates to examine the issue in depth and consider alternate strategies. Firstly, it must be accepted that it is not the ownership but the management of an institution which is of paramount importance for its success. Secondly all SOEs cannot be put into one basket. Some deal with the ‘commanding heights’ of the economy and are of strategic importance, some are purely commercial and others noncommercial. It is also important to gain from the lessons of past experience of Sri Lanka and the knowledge of international insights in privatization.

 Even after several episodes of privatization it is reported that Sri Lanka as of now has 527 state-owned enterprises which could be categorized under: 55 Strategic SOEs, 287 SOEs with commercial interests, and 185 SOEs with non-commercial interests. (Advocata)

 The typical criticism of SOEs is that they are not profitable as they are not free to determine the price of their products or services. While it is important to maintain a cost reflective pricing mechanism in SOEs it has to be conceded that SOEs have to strike a fine balance between helping the Government achieve its socioeconomic objectives while ensuring the enterprise’s financial viability. This challenge stems from the engagement of SOEs in the provisioning of essential products and services, which are sometimes not commercially viable; for instance, the provision of public transport to rural communities or electricity in geographically challenging areas such as in mountainous regions.” CBSL.

Without rushing into a frenzied bout of privatization it would be useful to learn from the experience of privatization in the past in Sri Lanka and abroad. Before resorting to surgery, it is essential to diagnose the malady. The problems of SOEs arise from three sources i.e., political interference, poor systems, and bad management. Political interference can be curtailed by law that the Minister is made to issue instruction only on policy and that too made in writing through the secretary of the ministry who is the chief accounting officer. All other interventions should be considered as illegal. Political interference occurs mainly on recruitment where Ministers insist on their list of candidates. It would be necessary to introduce a Public Enterprise Service Commission   parallel to the Public Service Commission vested with similar powers and functions. Even Provincial Councils have their independent Public Service Commissions.

With regard to systems, we need not invent new systems when we have a functional system in our public service tested over at least 74 years since independence. The Financial Regulations and Establishment code of the public service are updated only on rare occasions when necessary. Export Development Board at its first Board Meeting decided that the EDB will follow the Financial and Establishment rules of the government and any deviations necessary will be dealt with by the Board. The EDB dipensed with significant amount of funds in grants and financial assistance schemes and has had no deviations necessary and has had no audit queries. The critics of government rules are those who neglect forward planning or create emergencies with dishonest intentions. Deviations from FRs are allowed when reasons are adduced justifying the need for such deviation. In government departments even in ‘profit and loss’ accounts, annual accounts are finalized unfailingly on the 31st of December. But in the case of SOEs most of them do not even submit their accounts for several years.

Efficient management is the key to success of any enterprise in the public sector or in the private sector. A good management can set up a new organization and introduce an untested system effectively. A good example is the CTB where with nationalization a brand-new system had to be set up to operate a massive island wide organization. This was accomplished by a handful of administrators seconded from the civil service. Until the CTB became the employment exchange of politicians it was run efficiently providing an essential service and making profit. In fact, in 1964 the CTB paid a significant dividend to the Treasury.

Before privatization of an SOE it would be useful to examine the original objectives of establishing the particular entity. For instance, the CWE was for wholesale trade and to serve the cooperative sector. But one government stopped the CWE engaging in wholesale trade. Now CWE is focusing on retail trade. CWE should compete with the import trade mafia controlling the price of major commodities like sugar. State Trading Company was mainly to deal with restricted imports. STC could become a center for information on import trade serving the private sector. There are small SOEs which can be merged. There are others which only act as middlemen or conduits. They can be eliminated. If the original objectives of the establishment of the SOE has no validity the SOE should be scrapped.

Reckoning a chairman and a managing director for each SOE, the 573 SOEs would consist of over 1100 personnel. At present these individuals are picked on an ad hoc basis where political loyalty becomes the dominant criterion. Most of these henchmen have no long-term interest in the success of the enterprise and would only be keen to please the minister and would stoop to corrupt practices. With over 550 SOEs there is a need for a special cadre of around 1000 top managers to run these entities. This number exceeds the cadre in SLAS Special Class and Class 1 which at present is around 700. This cadre should be professionals seconded from the management cadres of the Public Service or selected out of present holders in the SOEs. Both officers on secondment and inservice personal should be absorbed through an examination and interview by the proposed Public Enterprise Service Commission. SOE service may  be structured in two or three grades. All holders of SOE posts should be given a high-level training in business management. Their salaries should not exceed the salaries of the parallel SLAS grades but they should be entitled to profit sharing. The posting of individuals into specific posts should be based on the needs of the job description of each post.

The feasibility of forming a holding company for say 10 of the most strategic SOEs on the model of Temasek of Singapore and SASAC of China should be considered. This should have the independence of business policy and operations similar to what is already enjoyed by the Port City.

Privatization decisions are of national importance and should be done carefully. All such decisions must be approved by the Parliament to avoid CBK type scams.

There are three key motives for privatization of SOEs. They work independently or frequently in unison. Economic rationale is the first and is relevant to loss making enterprises. Privatization is also resorted for private gain. There are many examples of such cases during the time of JR and CBK. Of course the justification is all that is done under economic compulsion. The third reason is ideological and followed religiously out of a belief in a particular politico-economic dogma.

The mass privatization of Public enterprises in UK by Thatcher was the best example of compulsive action. Thatcher stated that Privatization… was fundamental to improving Britain’s economic performance. But for me it was also far more than that: it was one of the central means of reversing the corrosive and corrupting effects of socialism…….. Just as nationalization was at the heart of the collectivist programme by which Labour Governments sought to remodel British society, so privatization is at the centre of any programme of reclaiming territory for freedom.’ (Thatcher, 1993).

She was influenced by the economic theory of monetarism, notably put forward by Friedrich Hayek‘s The Constitution of Liberty/

On the occasion of the 25th anniversary of Thatcher’s 1979 election victory the BBC reported that Together with US presidents Reagan and Bush, she helped bring about the end of the Cold War. But her 11-year premiership was also marked by social unrest, industrial strife and high unemployment.” Her critics claim British society is still feeling the effect of her divisive economic policies and the culture of greed and selfishness they allegedly promoted. We too suffer from that culture of greed and selfishness propagated in the free market policies of 1977.

Critics of Thatcherism claimed that its successes were obtained only at the expense of great social costs to the British population. There were nearly 3.3 million unemployed in Britain in 1984, compared to 1.5 million when she first came to power in 1979.

The public is made to believe that this policy is guided by the directions of the IMF. The Letter of Intent signed by the Presdent and the Governor of the Central Bank sums up what we have agreed with the IMF. There is no doubt it is impelled by the IMF Staff. The following is all that the IMF poposes and we have agreed on SOE reforms

Article13. Structural reforms are needed to strengthen the governance of SOEs and make them financially viable. To strengthen the governance of SOEs and enhance their financial transparency, we will:

  • clarify the mandates of key SOEs through Statements of Corporate Intent and hold their management accountable for delivering satisfactory results informed by key performance indicators;
  • (ii) review the framework for selecting SOE board members to ensure that they are qualified and independent; and (iii) ensure that all 52 major SOEs publish their audited financial statements, which could be accessed on a dedicated website. For 2021, 33 SOEs have so far published audited financial statements for 2021. We will ensure that the remaining 19 major SOEs will also publish audited financial statements for 2021 and that audited financial statements for 2022 will be published by end-June 2023.”

Why then is the President keen on privatizing even the profit making and strategical vital public enterprises. If the rationale is economic the IMF would have made it a condition. RW has been Mr. Clean other than the allegation of complicity in the Arjuna Mahendran Bond scam. A good guess is it is due to the Mont Pellerin Society dogma which is his guiding principle. RW was an active member of the Mont Pellerin Society (MPS) and even organized one of its meetings in Sri Lanka. The Neo Liberal ideology of MPS postulates that the elimination of state interventions in economic and social activities and the deregulation of labor and financial markets, as well as of commerce and investments is the panacea to resolve all economic and social problems of all nations. Thatcherism experience is relevant to the present attempt to privatise SOEs in Sri Lanka.

The presumption is that like Thatcher, RW is afflicted with the Mont Pellerin sickness and the canker of acute anti socialism and is determined to rescind all vestiges of substructures of socialism.

Sugath Kulatunga

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