State of SOEs

Some of Sri Lanka’s State-Owned Enterprises (SOEs) have had several eventful weeks. It began with the postal strike that was eventually resolved, and then the Ceylon Petroleum Corporation (CPC) tussled with SriLankan Airlines over its fuel payments, and over the weekend, it was reported that the Ceylon Electricity Board’s (CEB) losses had increased 250% in 2017 when compared with the previous year. 

Sri Lanka is a country that has had a large State sector for decades. Currently, Sri Lanka has about 400 SOEs, according to the Treasury, with over a million employees. Yet, only a handful of these SOEs make profits or generate returns for the public, and are largely seen as employment providers, rather than service providers. But, they do consume an extraordinary amount of resources and possess impressive assets.  

According to the Treasury, the Government, at the end of 2017, had contributed Rs.1, 150 billion as capital to 55 strategically important SOEs. Although the country has more than 127 commercial business enterprises, only 25% of them have contributed to the consolidated fund by way of levies and dividends in 2017, which amounts to Rs. 54 billion. However, the Government has channelled over Rs. 41 billion to SOEs through the Budget. 

Last year, 55 SOEs recorded a turnover of Rs. 1, 755 billion, which comes to about 13% of GDP. Out of these, 35 SOEs recorded net profit of Rs. 136 billion while 16 made net losses of Rs. 87 billion in 2017. The total asset base of SOEs grew by 13.6% in 2017, which made up about 57% of GDP.

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 2018 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.