Tiny steps for SOEs

President Gotabaya Rajapaksa has outlined ways for the Sri Lanka Transport Board (SLTB) to be made more profitable, which is a tiny step in the right direction. Losses incurred by State-Owned Enterprises (SOEs) have been a challenging issue for decades but it is doubtful that the Government has the capacity to push forward reforms that are badly needed. However, given the current economic situation, even the little steps can mean much.

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. 

SOE losses in 2018 doubled with the State losing a collective Rs. 160 billion from about 70 SOEs. The losses of entities such as SriLankan Airlines are regularly mentioned in Parliament with the Committee on Public Enterprises (CoPE) even demanding a fresh investigation into the causes of the losses last year. But the corruption and mismanagement across the public sector runs pretty much unchecked.   

The Ceylon Electricity Board (CEB) and the Ceylon Petroleum Corporation (CPC) also incur eye-watering losses annually but these are regularly overlooked because they are seen to be providing a public service. 

However, what cannot be explained away quite so readily is the Motor Traffic Department incurring a loss of Rs. 4 billion over its failure to acquire a vehicle licensing system, or the National Savings Bank hiring 2,600 staff assistants and peons without interviews at the behest of the former Finance Minister in 2008, or the People’s Bank ex-General Manager allowed to take home two vehicles including a BMW even after CoPE specifically ordered that he not be given a six-month extension. 

The details of mismanagement and wastage emanating from the CoPE sessions are jaw-dropping, not because they happened but because of the impunity extended to public officials and politicians that regularly and repeatedly break public trust.

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 requires any State support, which is likely to become the case as most cannot support repay their debt.

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.

These numbers are likely to have changed but SOE debt is a main source of economic instability in Sri Lanka because such debt often is accommodated through printed money, creating inflation and external vulnerability.

Political appointees, poor governance and management, absence of market-based pricing and powerful trade unions that scuttle both good and bad reforms have been some of many perennial issues plaguing Sri Lanka’s SOEs for decades. However, reforms, which could include public-private partnerships or outright privatisation, come with political dangers that the Government appears reluctant to tackle. Yet with COVID-19 impacting the economy and public finance in particular the Government will have to consider some form of SOE reforms to reduce losses and improve fiscal space.