Managing State assets

Selling State assets, even when they are loss-making, is an extremely contentious issue in many countries. Sri Lanka, with its high debts and limited revenue earning measures, has had to take a hard look at increasing the efficiency of its assets, but this has increasingly become more a political issue than an economic one. 

Former President Mahinda Rajapaksa went on record this week, warning foreign countries against entering into joint ventures with the current Government on State projects as he would “relook” at them if he returns to power. These types of populist statements are popular among politicians, especially when elections are around the corner, but rarely consider the economic burden that they place on the public. 

When State assets become loss-making, they have to be funded by taxpayers, forcing governments to increase taxes and divert revenue that could be spent on healthcare, education and housing into maintaining corporations that provide little or no benefit to the people. In extreme cases, more loans have to be taken to repay old loans, entrapping countries in colossal debt and causing massive macroeconomic headaches to governments. These hidden costs are rarely seen by the masses, but governments are stepping up to tackle them. 

Freshly elected Pakistani Prime Minister Imran Khan has announced plans to place all of the country’s State-owned companies into a special fund to be managed at arm’s length from the Government. One of the first acts of the new Government would be to move some of the country’s biggest companies, including its national airline, away from government control. The plan to remove government control from about 200 companies would prepare the ground for an eventual International Monetary Fund (IMF) bailout. The extensive measures, which are to be kicked off within the first 100 days of the new Government, would entail the new fund cutting losses and debts of the State entities before deciding which can be privatised and which could be restructured.

This is the latest attempt by Pakistan to address its ailing State-Owned Enterprises (SOEs). Previous efforts were met with limited success, and it is clear that the new Prime Minister feels that moving fast at the beginning of his term when he still has the highest level of public goodwill might make his job slightly easier. 

The Sri Lankan Government also made several similar proposals in its first two years that have now largely fallen by the wayside. Even efforts to list non-strategic SOEs are still being worked out, and only the Hambantota port venture was completed. Mattala is a work in progress, but heftier challenges, such as restructuring SriLankan Airlines, making Ceylon Electricity Board (CEB) and Ceylon Petroleum Cooperation (CPC) more efficient, have seen marginal progress. 

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 repaying 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. 

As difficult as it is, an emotionally driven political discourse on loss-making State assets should not be allowed to take precedence over the economic facts. But, as elections inch closer, stakeholders who take a rational view of State assets may find themselves besieged.