SOE reform steps

Cabinet this week approved a couple of Government proposals that could be positive for State Owned Enterprises (SOEs). The most important being the setting up of a separate company to take ownership of existing highways and to seek investment for new ones. The company will be fully Government-owned but will seek to take some of the expenses away from the Treasury. 

The second Cabinet decision pertaining to SOEs was approving a Cabinet Ministerial Committee to evaluate investment opportunities for 80% of 14,000 acres of land owned by the Railway Department. Even though the Department usually racks up billions in losses each year, if its assets are invested properly it can push much of its balance sheet out of the red. Positive as these measures are they have to be underpinned by transparency, stronger regulatory rules and honest leadership focused on public interest. 

Losses incurred by SOEs has long been an issue that has worsened fiscal problems in Sri Lanka. Prolonged losses by SOEs, partly due to unsound decisions made by policy makers, have resulted in large Budget deficits. And despite the need to reform critical SOEs, successive Governments have failed to achieve this in a genuine and sustainable manner.

The “State of State Owned Enterprises” report for 2019 released by think tank Advocata, pointed out that internal control, monitoring and governance frameworks seem inadequate to deal with major problems of SOEs, making restructuring difficult. Of the 400-odd entities, regular information is only available for 55. Even obtaining a complete list of entities proved to be a challenge. Financials are routinely late and only a minority obtain ‘clean’ audit reports. Of the 55, only 11 had published an annual report for 2016 by the time the Department of Public Enterprises compiled its Performance Report for 2017. 

Underperformance appears common; according to the Department of Public Enterprises the 55 largest delivered a net Return on Assets (ROA) of only 0.64% in 2017. The combined losses among the loss-making entities reached Rs. 87 billion in 2017 compared to Rs. 42 billion in 2016. 

Some are in deep trouble. The Petroleum Corporation carries a negative equity. Sheer incompetence and corruption have pushed SriLankan Airlines close to financial collapse. Central budget support to SOEs amounted to Rs. 41 billion in 2017, and both 2019 and 2020 has not helped matters much. 

The reports of COPE and the Auditor General highlight repeated instances of fraud, mismanagement, corruption and negligence. The issues no longer appear to be isolated incidents of opportunistic behaviour by individuals, or occasional lapses in control, but point to deeper structural weaknesses, which need to be addressed by reforms, and when forming new SOEs as in the highways company. 

Despite being a relatively small country Sri Lanka is estimated to have about 400 SOEs, and addressing their issues piecemeal has proved difficult. The passage of the 20th Amendment is unlikely to help matters, as it weakens audit and procurement oversight and exempts entities partially owned by the State from Auditor General purview. 

Cherry picking the most lucrative SOEs and reforming them may help the Budget and fiscal management, but for them to truly meet the demands of public interest they must also be conducted in as transparent and accountable a manner as possible.