Reform of state-owned enterprises will go nowhere sans authentic leadership

SOE reforms will not succeed unless the leaders are role models in walking the talk. The tone from the top is critical

How can a Government implement SOE reforms when it does not function as a role model? The hypocrisy, and the duplicity, in our current system of governance is clear when a 73-year-old President who, in the years past, vociferously opposed large cabinets and bloated bureaucracies, panders to those who keep him in power. This is a President who fortuitously catapulted into a position of ultimate authority through a sleight of hand and a quirk of fate. He has been given an opportunity of leaving a legacy, an opportunity which had eluded him over many years. It beats me as to why he, a seasoned campaigner in the last lap of his career, could not set aside politics and self-interests, in acting in the best interest of the nation and in the best interest of its citizens

The reform, and restructure, of Sri Lanka’s State-Owned Enterprises (SOEs), whether it is Government driven or IMF forced, are absolute musts if we are to rise like a phoenix from the ashes of our current economic ruin. Although, the perilous state of most of our SOEs has been a frequent subject of intense discussion over many years and although the negatives of the SOE’s current operating model, its capabilities and weaknesses have been starkly evident to the various persons who, and Governments which, have ruled the country over the last three decades, very little has been done to redress the situation because of political expediency. 

The ruling party of various times, and the politicians, have, in their quest to retain power, been unwilling to take the radical measures which are critical to making the culprit SOEs more effective in serving their customers. They fear that the initial discomfort, and perceived hardships, of big change may not sit well with the constituents and may lead to a loss of vote. Further, there are some, in authority, who are desirous of prolonging the present SOE structure because it is a structure rife with poor internal controls, weak financial management and toothless governance, and, therefore, enables shenanigans, skulduggery, nepotism and corruption. 

Political expediency aside, the operations of most of the SOEs are in the vice grip of power blocs and trade unions. Despite receiving massive mandates from the people and enjoying overwhelming majorities in parliament, Government after Government have shied away from taking on the “mafia” and the powerful cabals which control these organisations. As I said earlier, the turning of a blind eye and the giving of a deaf year suit the furtherance of their self- interests. Why have governments been ineffective in driving SOE reform and why are governments so powerless in confronting the cabals? 

One reason for sure is that the various governments of the day have not been role models in walking their talk. Very rarely have they acted in a spirit of cost consciousness in the best interest of the country and its citizens in areas which come under their decision purview. Neither have they been effective in serving their constituents efficiently nor have they made any concrete moves in improving governance, enhancing productivity, lowering the cost of services/production, stamping out corruption, right sizing the workforce and eliminating wasteful expenditure in both the Government and the various SOEs. The leaders, and the governments they lead are unable to portray credibility in their preaching because they, themselves, have not practised the message. To them, everything is a political game designed to serve their individual needs. 

Take for example, the recent appointment of 37 new State ministers in addition to the 20 ministers who are already there. Here is bankrupt Sri Lanka, struggling, and straining, to make ends meet and the President sees it fit to add more expenditure where the costs exceed the benefits. Often are the occasions where the President has reminded the citizens that frugalism, austerity and belt-tightening are essential in extricating ourselves from the quagmire into which we have fallen. But-alas, it is the same President who appoints a bloated bureaucracy in managing a nation of 22 million people. Why were these 37 appointments necessary? Let us face facts. They were necessary to appease the party which holds the majority control in Parliament. They were necessary for a President who, despite wielding great power as per the current Constitution, wants to curry favour with a band of failed politicians who helped him to become the President, a position he has covered over many years. 

In an apparent bid to defuse the cries of the citizens, there have been mixed messages as to whether the new State ministers will only get the pay they are entitled to and not any benefits or privileges which usually go with the posts or vice versa. Whether that is true or not or whatever the facts – it is the principle which matters and not just the rupees and cents. On the one hand, the President is asking for governance reform, SOE reform and belt-tightening while on the other hand he is practising what he told the citizenry not to do. 

It is in that light, I question – how can a Government implement SOE reforms when it does not function as a role model. The hypocrisy, and the duplicity, in our current system of governance is clear when a 73-year-old President who, in the years past, vociferously opposed large cabinets and bloated bureaucracies, panders to those who keep him in power. This is a President who fortuitously catapulted into a position of ultimate authority through a sleight of hand and a quirk of fate. He has been given an opportunity of leaving a legacy, an opportunity which had eluded him over many years. It beats me as to why he, a seasoned campaigner in the last lap of his career, could not set aside politics and self-interests, in acting in the best interest of the nation and in the best interest of its citizens. As Nicola Machiavelli so aptly stated: “Politics has no relations to morals.”

Sadly, in this backdrop, it is the citizens who are the ultimate losers in more than one sense. They must pay higher taxes in funding the unwarranted Government expenditure and they are forced to pay inefficiency laden high prices for the goods/services provided by the SOEs. Is it not therefore, unsurprising that the citizens of this country are agitating for a change of system and a change of approach? They are yearning for authentic leaders embodying benevolence, firmness, equity, and fairness.

The creation of SOEs with the espoused belief of providing essential goods and services at cost or at prices affordable to citizens, particularly the low-income and middle-income citizens, may, in the eyes of critics, be another one of the many populist actions, such as subsidised rice, subsidised fertiliser, public sector salary increases and tax cuts et cetera, of political leaders in their ride to power through a majority vote. While there are many thought leaders who believe that the Government must not be involved in business, the primary task of SOEs is not to generate super profits but to deliver strategic value to all stakeholders of the economy by facilitating and uplifting their productive potential and overall wellbeing. 

According to the Central Bank of Sri Lanka Annual Report – 2021, there are, currently, over 500 SOEs operating in several key sectors including power, energy, finance and insurance, water, aviation, health, and education, among others. The Report states that of these, 52 SOEs have been identified as State-Owned Business Enterprises (SOBEs) as they are regarded to be strategically important to the functioning and transformation of the economy. SOBEs in Sri Lanka include the Bank of Ceylon, People’s Bank, Sri Lanka Insurance Corporation Ltd., Ceylon Electricity Board (CEB), Ceylon Petroleum Corporation (CPC), Sri Lanka Ports Authority, SriLankan Airlines, Sri Lanka Transport Board and State Pharmaceuticals Corporation, among others.

Whilst other Asian countries such as Singapore, Malaysia and China have had mixed success in providing public goods and services at price and quality levels demanded by the citizens, Sri Lanka’s record in this regard has been extremely poor. Recent reports, published by PublicFinance.lk, reveal that the total loss of 52 key SOEs in the first four months in 2022 was Rs. 860 billion compared to the loss of Rs. 26 billion reported in the same period in 2021. As a matter of note, the annual loss in 2021 was Rs. 86 billion and the annual profit in 2020 was Rs. 34 billion. The depreciation of the Sri Lankan Rupee has been a major contributor to the Rs. 860 billion loss in the first four months in 2022. The Ceylon Petroleum Corporation (CPC) with a loss of Rs. 628 billion of which Rs. 550 billion was due to foreign exchange losses, the Ceylon Electricity Board (CEB) with Rs. 47 billion and Sri Lankan Airlines (SLA) with Rs. 248 billion were the main culprits. It is, indeed, a breath of fresh air to note that Kanchana Wijesekera, the Minister of Power, and Energy, is initiative-taking in his attempts towards reforming and restructuring the CPC and the CEB. 

A study of SOEs in Sri Lanka identifies the following as the significant reasons for their mediocre performance. 

(1) There is little or no financial transparency and/or accountability; judging by their operating models, it is as if they are set up to fail. There is a lack of policy driven control. Comparison of “actuals” against “plans” is minimal. SOEs are allowed to borrow from each other and/or provide goods and services to each other on credit terms with no deadlines on repayment. State controlled banks are forced to provide loans for projects even when they do not meet the bank’s normal credit criteria. There is no performance management. 

(2) Inadequate financial reporting and disclosure; surveys reveal that only 10% of SOEs regularly publish their financial, and performance, information. The Internal Audit function is weak in most instances. Even where it exists, audit reports are not given adequate attention and follow-up. 

(3) Bloated workforces; the study reveals that the workforce in SOEs is approximately 70% more than that of comparable private sector organisations. Based on my own knowledge of two SOEs which were privatised, I believe that the 70% is an understatement. This situation is the result of politicians employing their supporters in SOEs even when no vacancies exist. Further, with political stooges with no skills and/or qualifications being appointed to key positions, the genuinely hardworking employees, particularly the professionals and the experts, have lost their passion and motivation because of such non-meritocratic political machinations in decision making. Decisions are based on politics and not on merit. 

(4) Monopolistic practices; SOEs which are monopolies such as the CEB and the National Water Supply and Drainage Board (NWSDB) have no incentive to innovate. Consumers have no option other than to accept whatever that is made available. Even where an industry has been freed for open participation, unfair trading practices have been used in discriminating against private sector organisation wishing to enter the 

industry. 

(5) Poor corporate governance; Board members who are very often the lackeys of the ruling party lack the vision, strategic knowledge, and expertise in steering the subject SOE in a manner that is facilitatory of the stated Vision and Mission of the Government.

Sri Lanka’s economy is, currently, in disarray. Debt sustainability, Government solvency and foreign currency reserves remain critical concerns. Data indicates that 86% of the tax revenues in 2021 was spent on paying the salaries of public sector employees. This is unsustainable by any standard because it leaves little for the non-remuneration expenditure in maintaining, upgrading, and developing key areas such as health, public transportation, and education, just to name a few. While there are frequent calls for privatisation and deregulation, SOEs continue to be the major providers of infrastructure and essential services in Sri Lanka and in many developing countries. 

However, the incidence of low productivity, rampant corruption, existence of self-serving power blocs and the absence of a motivation in providing goods and services at a cost which balances price and quality are making SOEs a significant burden on the budget and Government and have resulted in fiscal and economic crises. With inflation announced at 65% in August 2022, immediate and drastic action is required. Whilst solutions to the SOE crisis range from disinvestment, equitisation, full privatisation, partial privatisation, restructuring and reform, and there are many ways of skinning the cat, I take the view that effective reform of SOEs can take place only if there is authentic leadership.

With the “Aragalaya” having heightened a greater awareness of the negative outcomes of the sub optimal system of governance our country has been subjected to in the past six decades, the iron is appropriately hot in striking a note of urgency of SOE reform. 

From a steep increase in the prices of agricultural products following the fertiliser debacle and recent warnings from the Food and Agricultural Organisation of the United Nations (FAO) and the United Nations World Food Programme (WFP) re an estimated 6.3 million persons facing food insecurity and shortages of fuel and other essential goods because of enforced import control arising from the lack of foreign currency and short-sighted disturbances to the equilibrium of the natural forces of supply and demand to the inability to honour debt obligations, a lack of foreign exchange to import essential medicines and other basic which not too long ago may have been viewed as ‘luxuries’, the citizens are up in arms. 

The country is in a total mess. The citizens are sick and tired of the self-serving attitude of the current politicians and are crying out for change. The gravity of the situation calls for leaders who are astute, humane, and authentic. It calls for leaders who possess the capacity to steady and steer the ship. It calls for leaders who display sincerity of actions. 

While there is no set prescription on how persons must behave in leading change, and in this instance SOE reforms, there are two priorities which a leader must focus, namely: 

* Being a Role Model by walking the talk and practising what he preaches, and 

* Inspiring a Shared Vision by envisioning a future based on exciting and ennobling possibilities and by enlisting the masses in a common vision by appealing to shared aspirations. 

Admittedly, there is no quick fix. It is the beginning of a marathon. It will be a hard grind. But- then that is what is expected of a leader. Unless it is happening behind the scenes, which is not appropriate, I do not see our current leaders engaging with the masses in a spirit of collaboration. Instead, what I see are actions which portray self-interests, an “I know it all attitude”, a disproportionate obsession of detaining persons who are deemed to have engaged in lawless behaviour and equate to veiled threats against persons exercising their freedom of expression. Creating an environment which enables the challenge of the status quo is, also, an exemplary leadership practice which Sri Lanka’s national leaders have failed to value. 

These are my perceptions. Perception, very often, represents reality. As a first step, I urge our leaders to engage the citizens in a spirit of equality and convey to them the dangers, and the foolhardiness, of operating the SOEs in the present mode. There will, invariably, be unwelcome news which will cause stress and anxiety. Uncertainty about the future, always, creates anxiety in the present. However, engagement and transparency are the right courses in allaying these concerns. Most people find courage and consolation in acting as a community. They want to be in the “first eleven.” Realities must be communicated clearly and firmly within a spirit of empathy. 

There should be no “bull-shitting.” Be truthful. Adults appreciate being told the realities. I have always adopted a stance of: “The sour truth is better than the bitter lie.” I have found it to be effective. My experience in corporate, and social life, confirms that 80 to 90% of a population will rise to the occasion if they are told the truth and made to feel included and connected. Leaders must hold the line between optimism and reality and be flexible in cultivating hope and in assuring the followers that they have the capacity to contend with whatever may come next. Providing a clear-sighted view of the roadmap of SOE reform, including what may happen, what you plan to do, what your people can do and why you have faith in the plan, has never been more essential. 

In conclusion, SOEs must be reformed as a matter of urgency. Now is, the right time because the citizens of our country are looking for change and are therefore in a frame of mind to be more accepting of the changes. But – SOE reforms will not succeed unless the leaders are role models in walking the talk. The tone from the top is critical.

(The writer is currently a Leadership Coach, Mentor and Consultant and boasts 50 years of experience in very senior positions in the corporate world – local and overseas.)