SOE sorrows

Saturday, 18 June 2011 00:10 - - {{hitsCtrl.values.hits}}

AFTER much contention between the Ceylon Petroleum Corporation (CPC) and Ceylon Electricity Board (CEB) over the latter’s purchase of fuel, the foundation for peace has been established. Ministries of Petroleum Industry and Power and Energy have agreed to trade petroleum between the firms according to an annual rate formula.

For many months the Ministers traded comments about the non-payment of fuel expenditure with the CPC blaming the CEB for its colossal losses, while the CEB insisted that it would not be possible to give people low cost electricity unless the fuel was obtained at lesser price. Overburdened with massive losses, both State-Owned Enterprises (SOEs) have struggled to get their houses in order, preferring to blame the global price of fuel rather than admit that the massive mismanagement within the establishments was also a cause for the balance sheets constantly being in the red.

The CEB incurred a profit of Rs. 4.9 billion in 2010 after years of reporting losses while the CPC made an operation loss of Rs. 12.3 billion, it too sustaining heavy losses notably in 2007 and 2009, where losses exceeded Rs. 14 billion, said the 2010 Annual Report of the Finance Ministry.

A few weeks ago the CEB revealed that the Chief Engineer was being investigated for a Rs. 160 million fraud. This alone gives a hint of the large scale corruption and wastage happening behind the scenes. Despite years of bleeding public money, both organisations took a long time to realise that a rate formula might bring some method to the madness.

Accordingly, the CPC will sell five petroleum products including diesel, furnace oil and naphtha to CEB according to an annual rate formula. A committee is to be appointed soon to compile the rate formula. The committee will comprise representatives from the two Ministries, the CPC and the CEB boards, the Public Utilities Commission and the Ministry of Finance. The rate formula is to be introduced by the end of this year.

While the decision to introduce a pricing formula is welcomed, the reason as to the delay in establishing it is to be wondered at. Gas, another sensitive product, has had a Supreme Court approved pricing formula for several years and has been applied bi-monthly by the Consumer Affairs Authority (CAA). Not only is the framework important, but implementing it will have to be extremely efficient as well. Moreover, both institutions will save much more money by streamlining their management and reducing losses through corruption and mismanagement.

These are not problems that are limited to the CPC and the CEB. Bad decisions have plagued SOEs for years. This has resulted in the Government having to funnel over Rs. 30 billion or 0.5% of GDP to maintain the SOEs last year.

The report noted that many SOEs still continue to incur losses and remain as underperforming entities. Most loss-making SOEs continue to incur losses due to lack of good governance, low productive use of employees, weak financial management, lack of internal controls and structural deficiencies. Boards of management of some key SOEs have often made decisions that have not been socially or economically viable, violating Government policies and regulations, contributing significantly to the losses incurred by SOEs. This evaluation that the Treasury paints in stark colours portrays the amount of work that needs to be done.