Talk about SOEs

Presenting the latest Committee on Public Enterprises (COPE) to Parliament, its chair Sunil Hadunetti has called for officials of the Attorney General’s Department to sit in on proceedings to enable legal action to be taken against the responsible officials. 

This is a positive step as COPE does not have legal powers, and AG representatives sit in on similar committees in other countries. Following opening up COPE to media, it is hoped that increasing transparency will push for more financial accountability in State-owned enterprises (SOEs), which are notorious for being inefficient, corrupt, and wasteful.

But as elections draw nearer, it is also important to ensure that better management of SOEs become part of the narrative, where candidates have to set out clear goals in their manifestos of what they will do regarding SOE management. Unfortunately, SOEs only feature in public discourse when it comes to employment, and their fiduciary responsibilities are routinely ignored.  

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. 

SOEs were a major point of discussion in the early days of the current administration, but gradually dropped off the radar. It is time to revive the discussion.