Overhauling SOEs

President Gotabaya Rajapaksa’s new administration has called for applications from professionals, both in Sri Lanka and elsewhere, to be appointed as chairpersons and board members of regulatory and State agencies. 

According to a public newspaper notice published by President’s Secretary Dr. P.B. Jayasundera, the Presidential Secretariat has called for EOIs (Expressions of Interest) from experienced professionals to be considered for appointment to regulatory and promotional agencies, statutory bodies and institutions and commercial state-owned institutions. 

The aim is to appoint fresh officials who will be tasked with turning around loss making State Owned Enterprises (SOEs) and ensure they become viable entities. This is a worthwhile task and has been an important need for a long time. But it is also essential to push for a modern, transparent and accountable system of governance to be established within these SOEs and other entities so that they operate in the public’s interest. 

Sri Lanka is a country that has had a large State sector for decades. 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 when 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. It is now hoped this will change. 

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. Linked to credible appointments should be strengthening of watchdog entities such as the Committee on Public Enterprises (COPE) and Committee on Public Accounts (COPA), which have an important role in promoting transparency and anti-corruption measures.  Keeping these bodies open to media, allowing expert participation, building public-private partnerships when appropriate and taking legal action when necessary will also further the cause of making SOEs serve the public.