Accounting in SOEs

Sri Lanka’s financial governance can be described as inadequate at the best of times, but recent reports of 13 important Government enterprises not coming under the purview of the Auditor General raises serious questions on good governance, transparency and management of public finance on a scale that demands urgent attention.

Details of the companies emerged last week in Parliament. State-owned companies which have failed to provide a decent return during the past 10 years but continue to be funded by State coffers, creating controversy, were taken up by Opposition legislator Ravi Karunanayake.

Amazingly, none of these loss-making companies are audited by the Auditor General’s Department but subjected to a private audit, which has “no binding with the shareholders,” which includes the Government.    Mihin Lanka Ltd., Shipping and Aviation Information and Research Ltd., Polipto Lanka Ltd., Sri Lanka Thriposha Ltd., Rakna Arakshaka Lanka Ltd., Lanka Logistic and Technologies, Sri Lanka Savings Bank, Lankaputhra Development Bank Ltd., Sri Lanka Insurance Corporation Ltd., State Trading (Co-Operative) Wholesale Co Ltd., Lanka Sathosa, State Resources Management Corporation, and Gal-Oya Plantation Ltd., are the 13 companies established during the past 10 years.

Of these companies only Sri Lanka Insurance has managed to accrue profits and pay taxes, a return on investment that the government badly needs. Yet the financial governance of these institutions are not being regulated by the Auditor General. Deputy Finance Minister Dr. Sarath Amunugama has justified the move insisting that the companies were under a separate department and therefore need not be under the Auditor General. Yet the seriousness of the financial losses faced by some of the companies demand that the usage of public funds be strictly monitored. The best example is Mihin Lanka, which has been a bleeding sore since the day it was launched, incurring losses of a whopping Rs. 8.5 billion since its inception five years ago under the authority of President Mahinda Rajapaksa. Yet there has been no attempt made by authorities to stem the haemorrhage. It was reported that the cash-strapped budget airline has suffered a loss of Rs. 2 billion during the 2012 financial year alone, according to the Auditor General. Interestingly the Auditor General has observed that although the company is running at a continuous loss, the annual remunerations paid to the six-member Board of Directors have increased over the years.

Rs. 11 million has been paid to directors as remunerations last year – an increase on the Rs. 4.9 million paid for the previous year. The Mihin Lanka Chief Executive Officer (CEO), who is also the CEO of SriLankan Airlines, is paid Rs. 500,000 a month by each of the institutions as remuneration.

Both the organisations are severely loss making, with significant maladministration that has seen the national carrier especially losing clients in recent years. Despite promoting itself as a low cost carrier, Mihin has regularly delayed flights, low levels of service and a culture of inefficiency that has been boosted by mismanagement.  These details were given in a report compiled by the Auditor General to be presented before the Committee on Public Enterprises (COPE) last year.

Yet COPE has failed to question Budget allocations given to companies that are repeatedly making losses and establish a mechanism that makes top officials directly culpable for mismanagement of public finance. At the very least it should ensure that a performance-based pay structure is implemented for the Board of Directors and other top appointees. Mounting losses of State-Owned Enterprises clearly show that COPE is ineffective in its mandate of making SOEs more financially accountable. Even though the 2013 Budget insists that 46 out of 70 enterprises have transformed into profit making state, the larger losses continue to be piled on with little change in sight. The removal of the Auditor General from certain companies will only make this situation worse and pile more losses on an already burdened public.