{"id":107707,"date":"2020-10-17T16:19:27","date_gmt":"2020-10-17T23:19:27","guid":{"rendered":"http:\/\/www.lankaweb.com\/news\/items\/?p=107707"},"modified":"2020-10-24T14:30:11","modified_gmt":"2020-10-24T21:30:11","slug":"reform-of-state-enterprises-in-sri-lanka-revival-through-a-singapore-model-to-stop-the-haemorrhaging","status":"publish","type":"post","link":"https:\/\/www.lankaweb.com\/news\/items\/2020\/10\/17\/reform-of-state-enterprises-in-sri-lanka-revival-through-a-singapore-model-to-stop-the-haemorrhaging\/","title":{"rendered":"Reform of State Enterprises in Sri Lanka \u2013 Revival through a Singapore model to stop the haemorrhaging?"},"content":{"rendered":"

By Raj Gonsalkorale<\/em><\/span><\/h2>\n\n\n

55 largest SOEs delivered net Return on Assets (ROA) of only 0.64%\nin 2017. The combined losses among the loss-making entities reached Rs.87bn in\n2017 compared to Rs.42bn in 2016. Some are in deep trouble. The Petroleum\nCorporation carries a negative equity. Sheer incompetence and corruption have\npushed Sri Lankan Airlines close to financial collapse. Central budget support\nto SOEs amounted to Rs.41bn in 2017. The reports of COPE and the Auditor\nGeneral highlight repeated instances of fraud, mismanagement, corruption and\nnegligence. The issues no longer appear to be isolated incidents of\nopportunistic behaviour by individuals or occasional lapses in control but\npoint to deeper, structural weaknesses \u2013<\/em>\nAdvocata Institute<\/p>\n\n\n\n

The government of President Gotabaya Rajapaksa will\npresent its first budget on the 17th<\/sup> of November. Its challenges are\nmany, and they have been compounded by the impact of the COVID 19 pandemic.\nRecent events have shown that even the best managed COVID responses can have\ndrastic reversals and it has shown that Sri Lanka, and for that matter all\ncountries in the world are not yet out of the woods when it comes to COVID.\nThis makes it extremely difficult to govern and plan governance options.\nBesides the budget, the government of President Rajapaksa will have to work\nwith the people of the country to look towards the future and what policy\nsettings, based on behavioural changes that must underpin the country\u2019s future\ndirection, should be introduced. Life cannot be what it was before this\nPandemic. There is no return to a normal\u201d, as there was never a sustainable\nnormal. Among other things, a more sustainable new normal has to take into\naccount other challenges like deforestation, climate change, rising temperature\nlevels, vastly disproportionate disparities between the superrich and the lower\nincome groups, social inequities, and dwindling natural resources due to\nunbridled exploitation   <\/p>\n\n\n\n

In this context, something that can\nbe done and must be done, is to chart a better economic governance model. An\narea that needs immediate attention, much like a stopping a person bleeding to\ndeath, is the equivalent of that in commercial terms. This is the intense\nhaemorrhaging of people\u2019s money that has been going on in State Owned\nEnterprises (SOEs). The Advocate Institute report referred to above states that\nSri Lanka has a total of 527 State Owned Enterprises out of which regular\ninformation is only available for 55. These SOE\u2019s accumulate billions of losses\nannually due to sheer mismanagement. The precedence of corruption in the highly\nbureaucratic systems that govern SOEs are also a case for alarm says the report.<\/p>\n\n\n\n

Based on the information in this\nreport, the accumulated losses of the 55 State enterprises amounting to Rs 87\nbillion is 25% of the education budget allocation in 2019 and 37.5% of the\nHealth budget allocation in that same year. The central budget support for SOEs\nin 2017 amounting to Rs 41 Billion is 11.9% and 17.6% respectively of the\nEducation and Health budgets. This is money that could have been deployed to improve health\nand educational opportunities and standards for the people of the country. <\/p>\n\n\n\n

It is reported\nthat Sri Lanka\u2019s national carrier Sri\nLankan Airlines<\/a>, the epitome of\nmismanagement amongst SOE\u2019s, is expected to lose 130 million US dollars (about\n26 billion rupees) in the year to March 2020, taking total losses under full\nstate ownership and management to 232 billion rupees. This loss is 67% of the\nEducation budget allocation for 2019 and 100% of the allocation for Health in\n2019!! <\/p>\n\n\n\n

To add insult\nto injury, Sri Lankan Airline says it would also need a 300 million US dollars (approximately\nRs 60 Billion) capital injection to reduce a spiral of debt. It defies logic as\nto why the people of the country have allowed and are continuing to allow this\nlarge scale misappropriation of their money to go on unabated. In the aftermath\nof the COVID pandemic, no profitable airline will be able to get back to their\nnormal\u201d in the foreseeable future, and loss making airlines are bound to crash\ndown the precipices they are already at the edge of.  In this scenario, the Sri Lankan government\nwill have to give very serious thought to innovative solutions that can save\nSri Lankan Airlines.<\/p>\n\n\n\n

SOE\nhaemorrhaging is a stark fact. Precious money that would have been available\nfor key areas such as health and education have been deprived as a consequence\nof this dizzying scale of mismanagement and misappropriation. The decease is\nknown. The medicine for it is also known. What is needed is the guts to apply\nthe medicine. <\/p>\n\n\n\n

In an in-depth\nand intelligent article, Mr Prasanna Athukorale, an investment specialist who\nhas managed Global\nEquities portfolios in Sydney and in New York for large institutional investors\nsince 1995, has offered some proposals as to how this haemorrhaging could be\nstopped and a new life  injected into\nthese SOEs (see SOEs reform in Sri Lanka: An enhancement proposal, Sunday Times 27th<\/sup> September \u2013 http:\/\/www.sundaytimes.lk\/200927\/business-times\/soes-reform-in-sri-lanka-an-enhancement-proposal-417442.html<\/a><\/p>\n\n\n\n

Mr Athukoralehas very succinctly identified the two key issues that\nconstitute the problem, quote First<\/em>, let us separate the operational problems of the\nSOEs from their symptoms. Financial underperformance is often seen as the\nprimary problem of the SOEs. It is not. Financial underperformance is a symptom\nof the problem. The underlying problem is the lack of robust and responsible\ncorporate governance. Just like a competent physician would try to cure an\nillness rather than the symptom, the government must address the lack of good\ncorporate governance practices in SOEs rather than trying to fix the symptoms.\nThis distinction is critical to recognise before we formulate solutions. Lack\nof transparency in senior appointments and terminations, empowerment,\ndisclosure standards, procedures to manage conflicts of interest and\ncorruption, are just a few corporate governance shortcomings that are obvious. <\/strong>Secondly<\/em>, successive governments have not seen their ownership interest in SOEs\nthrough investment lenses. Boards and senior management of SOEs have not\noperated within an investment culture and mindset that continually requires the\ngeneration of returns that exceed cost of capital. There have been no\nmechanisms to incentivise senior management nor to penalise underperformance.<\/strong><\/p>\n\n\n\n

To underpin the above, one could say\nvery logically that people have not given heed to the fact that it is their\nmoney that has been squandered by successive governments and the squanderers\nhave given scant regard to whose money they have been squandering.<\/p>\n\n\n\n

Mr Athukorale proposes the following\nsolutions to address SOE reform. The writer wishes to reiterate here that the\nkey ingredient required to implement these or any other innovative solution is genuine\ndetermination, and while previous government leaders have not displayed this,\nthe current government with its 2\/3 majority has the ability to institute\nserious reforms to transform these SOEs into entities that will provide a\nreasonable return for the people of the country for the huge amount of their\nmoney that have been invested in these SOEs.<\/strong><\/p>\n\n\n\n

The following are based on extracts\nof the proposed solutions identified by Mr Athukorale in his article. The\nwriter suggests that readers acquaint themselves with these as extracts from it\nwhich are used here will not do justice to the comprehensiveness of Mr\nAthukorale\u2019s proposals.<\/p>\n\n\n\n

First<\/em><\/strong>, repeal all Acts of Parliament that established\nthe SOEs and be re-incorporated under the Companies Act<\/strong>. This would place the SOEs under a\nnew governance regime immediately. For example, the Ceylon Petroleum\nCorporation should be transferred from the Ceylon Petroleum Corporations Act\n(No.28 of 1961) and be incorporated under the Companies Act with a suitable\nlegal name. The defining characteristic of this proposal is to establish a\ndistinct legal structure where the government can retain ownership through a\nsovereign share class while ensuring a minimum level of good governance\nrequired under the Companies Act. Leaving SOEs to operate under Acts of\nParliament is the ideal recipe for the continuation of direct political\ninterference and consequent financial underperformance.<\/p>\n\n\n\n

The writer would like to add here\nthat in regard to the Ceylon Petroleum Corporation, while it is acknowledged\nthat the actual cost of fuel cannot be passed onto consumers as it could result\nin higher prices for goods and services such as transport, innovative solutions\ncould address this situation. For example, cost of fuel used by Sri Lankan\nAirlines could be passed onto those who travel on it, and alternate bus and\ntrain services, in addition to subsidised services, could be introduced where\ncost recovery could be done by providing additional benefits to consumers.\nBesides this, introduction of a more efficient public transport system using\nbuses and trains could reduce the consumption of fuel by motors vehicles. The\nCOVID pandemic also provides opportunities for continuing with working and\nstudying from home options, which has a consequential impact on not just fuel\nconsumption, but on the environment. Fast tracking renewable energy sources,\nusing such energy for train electrification are other options that could be\nconsidered.<\/p>\n\n\n\n

Second, <\/em>if the government wants to free\nState Enterprises from political interference\u201d (as promised in the manifesto),\nthen it is proposed that the responsibility for managing all SOEs be\ntransferred out of the various ministries to a newly established Sovereign\nWealth Fund (SWF), wholly owned by the government. The new holding company, the\nSovereign Wealth Fund, must be established under the Companies Act with full\nstate ownership and a constitutional amendment as described below. The SWF will\nbecome the holding company of SOEs and be responsible for introducing an\ninvestment culture and mindset and overseeing SOE performance. <\/p>\n\n\n\n

Thus, the SWF would set the\nobjectives, identify constraints, have the authority to appoint and replace the\nsenior management teams of each SOE. Each SOE would then be answerable to a\nsingle professionally run entity and effectively quarantine themselves from\ndirect political interference. Minimising indirect political interference will\nrequire multiple other measures, which are outside the scope of this article.<\/p>\n\n\n\n

The writer wishes to add here that this\nproposal may be regarded as the most politically difficult but necessary reform\nif political interference is to be stopped and if Parliamentarians are to shift\ntheir attention to policy issues rather than process management. Mr Athukorale\nstates the excellence of the senior appointments to the SWF, will signal the\ngovernment\u2019s intentions and be reflective of its credibility. The 225 MPs,\nministers, donors, friends, family and so on will not be able to appoint,\nterminate nor directly influence the senior management of SOEs nor lobby to\ngain an unfair advantage in awarding contracts. This is how Singapore\ntransformed their SOEs nearly 45 years ago. As happened in Singapore, this\ntransfer would relieve ministries of the task of managing business enterprises\nand allow them to focus on policy formulation, regulation and the provision of\nservices\u201d.<\/p>\n\n\n\n

Third<\/em>, Mr Athukorale contends that if the government wants to make the\nreforms permanent and provide policy stability, then it should amend the\nConstitution of Sri Lanka similar to amendments adopted in the Constitution of\nSingapore in 1974. Temasek Holdings Pvt Ltd is a Singaporean holding company,\nwholly owned by the Singapore Minister for Finance Incorporation Act (Chapter\n183). Please see https:\/\/sso.agc.gov.sg\/Act\/MFIA1959. Incorporated in June 1974\nas a commercial investment company by Prime Minister Lee Kwan Yew, Temasek owns\nand manages Singapore\u2019s SOEs under the key theme of transforming the\nSingaporean economy. Subsidiaries of Temasek include Singapore Airlines,\nDevelopment Bank of Singapore, Singapore Telecomm, ST Engineering and Capita\nLand etc.<\/p>\n\n\n\n

Fourth<\/em>, if the government wants to achieve Singapore-like performance\noutcomes, then, the  appointments to the\nBoard of Directors and the senior management team of the SWF should be made in\nsuch a manner that the Board represents the interests of the government on\nbehalf of the people of the country and also includes members who are of proven\nbusiness acumen and performance. No doubt, the Sri Lankan public, the\ninvestment and lender communities, sovereign rating agencies, the World Bank,\nIMF and the ADB and other international lending agencies will keenly await the\nsignals the government sends.<\/p>\n\n\n\n

Fifth<\/em>, a major shift in SOE corporate governance as articulated by Mr\nAthukorale is in the ownership of the SOEs. If one may try to understand the\ndistinction between what is there now and what is proposed, it is that under\nthe proposal, the government will own the equity but the SWF will own the SOEs\nfrom a governance point of view. It will be the responsibility of the SWF to\nreturn a solid return for the government\u2019s 100% equity. This approach then\nleads to other consequential approaches. <\/p>\n\n\n\n

For example, Mr Athukorale states that there must be a strong separation\nof duties between the owners and the management of an SOE. The chairman and the\nboard of directors of an SOE should represent the interests of the owners,\ni.e., the Sovereign Wealth Fund, SWF (not the government under this proposal).\nThe SWF as the new owner would now delegate authority to the SOE board. <\/p>\n\n\n\n

As such, the SOE Board should consist of non-executive directors, (with\nthe obvious exception of the CEO should he\/she be a director) in that, their\nrole is one of oversight and governance, not carrying out day to day management\nor implementation. The management team of each SOE should be led by a chief\nexecutive officer (CEO) and a suite of executives responsible for setting the direction\nof the SOE, implementation, finances, human resources and such day to day\nactivities. Incorporation under the Companies Act will require this separation.\nUnder current Acts of Parliament, the chairman has usually functioned as the\nde-facto CEO making a mockery of corporate governance.<\/p>\n\n\n\n

Sixth<\/em>, to ensure checks and balances, parliamentary oversight of the SWF\nshould be through a body similar to the Committee on Public Enterprises (COPE)\nwith representation from the government, the Opposition as well as eminent\nnon-parliamentarians with subject expertise nominated by the political parties\ndepending on the industry of the SOE. The scope and objectives of COPE should\nbe revisited in light of this proposal. The primary focus should be on\noverseeing the governance, financial performance of the key SOEs and the\naggregate financial performance of the SWF.<\/p>\n\n\n\n

Lastly,<\/em> in the medium to long term, if the government wishes to broaden\nand deepen local capital markets, newly issued common class stock stakes can be\nsold to the long-term institutional investors like the Employees Trust Fund and\nto SOE employees, while retaining but diluting sovereign class ownership. A\nlisting on the Colombo Stock Exchange (CSE) will help take SOE transparency to\nan even higher level through compliance with the CSE\u2019s disclosure requirements.\n<\/p>\n\n\n\n

The writer hopes that President Gotabaya Rajapaksa, Prime Minister\nMahinda Rajapaksa and Minister Nivard Cabraal, will consider these proposals in\norder to deliver on the political pledges made to achieve SOE reforms that will\nbe effective and permanent. It is hoped that their silence so far on a SOE\nreform agenda is indicative of a deep rooted examination of options, including\nthe ones articulated by Mr Athukorale, rather than an evasive slumber of political\nexpediency and more of the same in the end.<\/p>\n","protected":false},"excerpt":{"rendered":"

By Raj Gonsalkorale 55 largest SOEs delivered net Return on Assets (ROA) of only 0.64% in 2017. The combined losses among the loss-making entities reached Rs.87bn in 2017 compared to Rs.42bn in 2016. Some are in deep trouble. The Petroleum Corporation carries a negative equity. Sheer incompetence and corruption have pushed Sri Lankan Airlines close […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":true,"template":"","format":"standard","meta":{"footnotes":""},"categories":[9,102,172],"tags":[],"class_list":["post-107707","post","type-post","status-publish","format-standard","hentry","category-business","category-economy","category-raj-gonsalkorale"],"_links":{"self":[{"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/posts\/107707","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/comments?post=107707"}],"version-history":[{"count":0,"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/posts\/107707\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/media?parent=107707"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/categories?post=107707"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/tags?post=107707"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}