Solving SOEs

The International Monetary Fund (IMF) in its latest review has called on the Government to end delays in State Owned Enterprise (SOE) reform as debt levels hit new highs. In 2017 the accumulated losses of just three SOEs, namely, Ceylon Petroleum Corporation (CPC), Ceylon Electricity Board (CEB) and Srilankan Airlines was a whopping Rs.52 billion or 0.4% of GDP. 

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 to 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.  

The 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.  This could be made worse in 2018 as global oil prices continue to climb.  

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 be public private partnerships or outright privatisation, come with political dangers that the Government appears reluctant to tackle. But it is increasingly apparent that delays will come at great cost to future growth prospects. 

The obvious economically efficient solution is to find PPPs or privatise as many of the State-Owned Enterprises as possible over a realistic period of time.  If large scale reform is not feasible, the Government has to look at what can be done in the short term, over the next one or two years, to improve the current dismal situation that might deliver better results.

A sensible place to start is by improving the running of the enterprises; make them more commercially viable, more productive. Enterprises that essentially operate in a commercial sphere, where there is some competition already or where there could be more competition, would be easy contenders for this role. 

Separating commercial enterprises from monopolies is sensible, and the Government has already earmarked four hotels and one hospital to be listed in the Stock Exchange. The stagnation of these projects is sparking concern as the window for reform keeps shrinking. Parallel proposals to establish a holding company such as Temasek have also been gridlocked, but that is a medium term measure, which the Government can tackle once it resolves introducing better management practices within SOEs.    

In other words, the Government does not need to put all SOEs in a holding company; they can make a selection of those that operate in a commercial sphere, which can be corporatised with initially majority State ownership.

The holding company could include airlines, buses, telcos, and whatever is commercially viable and subject to competition. The Government has the option of deciding what percentage to keep under its control and eventually they could even exit altogether, as has been done with some companies under Temasek. 

Whatever the Government ultimately decides, it is of paramount importance that a start must be made, because debt will only continue to grow.