A losing battle?

Thursday, 13 June 2019 00:00 -     - {{hitsCtrl.values.hits}}

State-Owned Enterprises (SOEs) are important to provide essential services, but their losses have doubled in the past year, prompting the Finance Ministry to rethink continued support. Sri Lanka has an abundance of SOEs, but their chronic underperformance has left them a challenge to successive Governments.    

Out of 422 SOEs, 55 have been identified as strategic enterprises, of which 37 recorded a net profit in 2018 amounting to Rs. 131 billion, a drop in net profit of compared to Rs. 136 billion made by 39 SOEs in 2017, as recorded in the annual report of the Department of Public Enterprises.  Another 16 SOEs reported net losses amounting to Rs. 157 billion, while in 2017 the loss recorded was Rs. 87 billion. 

The losses are usually overlooked by the public, because the SOEs are seen as providing essential services, but this is largely because they are monopolies. For example, the most important - Ceylon Electricity Board (CEB), Ceylon Petroleum Corporation (CPC), SriLankan Airlines, and Sri Lanka Ports Authority (SLPA) - all function as monopolies, with only the latter making profits. 

Even though SOEs occupy significant space in the economy, it is by no means a reflection of their potential or capacity. In fact, the return on assets is merely 0.64%, with all 55 business enterprises put together. Clearly, these business enterprises have not been performing at full potential. The reasons include a lack of good governance, lack of clear accountability mechanisms, issues associated with policy and legal frameworks, and a weak supervisory role played by SOE management.

In mid-2017, Moody’s Investors Service put Sri Lanka’s public enterprise debt at a whopping 14% of GDP, and warned the Government of additional risks to its finances, should such debt require any State support, which is likely to become the case as most cannot support their debt repayment.  

This translates into a massive debt pile of little under $ 12 billion, or Rs. 1,848 billion, that has accumulated due to the continuous annual losses. According to Moody’s, the total liabilities include Government guarantees, outstanding SOE debt to the banking system, and outstanding SOE foreign borrowings.  

The SOE debt is a main source of economic instability in Sri Lanka, because such debt is often accommodated through printed money, creating inflation and external vulnerability. This could be made worse in 2019 as global oil prices continue to climb.  

Political appointees, poor governance and management, absence of market-based pricing, and powerful trade unions that scuttle both good and bad reforms, have been some of many perennial issues plaguing Sri Lanka’s SOEs for decades. It is imperative that the Government pushes ahead with its SOE reforms to maintain economic stability in such an environment. Political fallouts from such reforms could be managed with better engagement, clear communication, and consistent policies. These are the aspects that the Government should ideally concentrate on, even with elections ahead. 

Finance Minister Mangala Samaraweera has already warned that SOEs should stop getting public funding after three years, and their leadership should be held accountable for the losses. This should be expanded to include the relevant line Ministries and Ministers as well, since many of the worst decisions either originate or are assisted by the political establishment. Given the slow pace of reform, it is likely that more taxpayer funds will be thrown at SOEs to keep them functional.