Tip of the iceberg

The $ 2 million corruption scandal of SriLankan Airlines is a shocking indication of how much transparency and governance is needed for State Owned Enterprises (SOEs). Even though the Government has kicked off legal action in the case of the national carrier, there is still a great need to make structural changes to SOEs so that corruption and wastage are minimised. 

Of course this latest scandal is nothing new. SriLankan Airlines has been mismanaged for a long time. There have been multiple reports, including a Presidential Commission of Inquiry into the organisation, but no action was ever taken. SriLankan Airlines accumulated a net loss of Rs. 17.2 billion in 2018. To date, the airline has accumulated losses of Rs. 169 billion since nationalisation in 2009 by Prime Minister Mahinda Rajapaksa. 

In 2018, a special report on the airline by the Auditor General’s Department found various accounts of malpractice across the enterprise, including failure to follow procurement guidelines in the selection of consultative companies, failure to introduce formal control systems for the implementation of plans, a lack of a proper cost-benefit analysis in validating expansion of the fleet of aircraft, failure to conduct proper analysis on the method of selection for acquiring aircraft and failure to follow Government procurement guidelines in the acquisition of aircraft. 

Unfortunately, these are not ills that are limited to SriLankan Airlines. 

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 compared to the 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. 

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. 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 a little under $ 12 billion or Rs. 1,848 billion, which has accumulated due to continual annual losses. According to Moody’s, the total liabilities include Government guarantees, outstanding SOE debt to the banking system and outstanding SOE foreign borrowings.  

Political appointees, poor governance and management, the absence of market-based pricing and powerful trade unions that scuttle both good and bad reforms have been some of the many perennial issues plaguing Sri Lanka’s SOEs for decades. The Government of President Gotabaya Rajapaksa has ruled out privatisation, preferring instead to attempt better administration. To this end, they have made new appointments but this alone will not resolve the issue completely. Implementing better governance structures is essential to holding officials, especially those at the top, accountable. 

The $ 2 million corruption scandal will be closely watched and it is hoped this Government acts differently from its predecessors and delivers justice.