SOEs and COVID-19

Sri Lanka has had a longstanding issue with its State-Owned Enterprises (SOEs) that have arguably been made worse by COVID-19 impact. In the most recent Finance Ministry report, SOE returns to the Treasury in 2020 have been only a fraction of dividends and levies it received in 2019. This creates fiscal management challenges and highlights the need for the Government to retain focus on reforms to put SOEs on a sustainable footing. 

According to the Finance Ministry data, the SOEs had transferred a total of Rs. 5,081 million in levies and Rs. 2,407 million in dividends into the National Treasury, which together works out to Rs. 7,488 million during the eight months to August, a sharp fall from Rs. 27,857 million a year ago. Large SOEs such as the Ceylon Petroleum Corporation (CPC) and the Ceylon Electricity Board (CEB) have not managed dividends for years and needed additional funding from State banks to meet their payrolls. Nonetheless the public sector, including SOEs, saw less salary cuts and other reductions compared to those experienced by the private sector.  

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 did not help 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 the Auditor General’s 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. One aspect that has been explored is listing SOEs, which may help in infusing more professionalism into a sector that is too important to be left behind.