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The following is based on the speech delivered by World Bank Sri Lanka Country Director Dr. Idah Pswarayi-Riddihough yesterday at the launch of the Handbook on Good Governance for Chairmen and Boards of Directors of Public Enterprises with Speaker of Parliament Karu Jayasuriya as the Chief Guest. Auditor General Gamini Wijesinghe, Human Resources Development Council Chairman Dinesh Weerakkody, CA Sri Lanka President Jagath Perera, CA Sri Lanka Public-Sector Wing President V. Kanagasabapathy and Sri Lanka Institute of Directors President Preethi Jayawardena were also present
By Dr. Idah Pswarayi-Riddihough
I thank the organisers for the invitation to deliver the keynote address at this event, which marks a collaborative outcome of several leading Sri Lankan institutions committed to the practice of good corporate governance. This initiative resonates well with our mission to end poverty and promote shared prosperity.
While many of us may not be governance specialists; we can equally relate to the impacts of good and bad governance. It’s this shared experience that has brought you all here today; that has influenced the development of the handbook that is being launched today; and that dictates that the recommendations in this guidebook be implemented.
Let’s start with the what. What does good governance require? It requires credible and trustworthy institutions built on principles of transparency and accountability. Accountability goes beyond the mere responsibility of delivery of a task or service. It also means answerability if a service is not delivered in a timely and efficient manner such that it becomes a burden. It is the citizens’ right but also their duty to demand it.
What is true at an individual level, is true at the level of a society. International experience, from research, and also as illustrated in a few countries, such as Botswana, Chile or South Korea show that there is a strong positive correlation between accountable and transparent political and economic institutions and the sustainability of the development outcomes. Douglas North’s historical analysis of the transition from natural states to open societies shows how the latter are more sustainable as they use economic competition rather than political institutions and rents to regulate social relations.
Likewise, numerous cross country studies show the negative impact of corruption on growth and investment. For example, a Study by Aidt et all (2007) of 70 countries indicated that countries with higher quality institutions experience higher growth and lower corruption. It further estimated that countries moving to high quality institutions had a growth premium of 26% in the short run and 40% in the long run.
Similarly, the World Bank’s publication on the changing wealth of nations shows that beyond capital accumulation, it is a country’s intangible capital that makes the difference. Intangible capital being composed of human and natural capital, institutional capital and social capital.
I trust these dimensions of development are also very relevant for Sri Lanka, which has made important progress in strengthening the country’s governance framework and institutions with the 19th Constitutional amendment. The amendment provides for more independent accountability of institutions such as the Human Resource Development Council, the Auditor General, Information and the Procurement Commission.
The recently approved Right to Information and Audit Acts are also very progressive. All these create a conducive environment to improve the transparency, accountability and performance of the public sector in general, and of public enterprises.
Public enterprises represent a major part of Sri Lanka’s public-sector institutions, and their governance therefore matters greatly. Around 400 SOEs operating in Sri Lanka play a key role in the country’s economy not only in terms of size, but also because they provide the most important infrastructure and services.
Total turnover of the 55 strategically important State-Owned Business Enterprises (SOBEs) alone amounted to Rs. 1.5 trillion, equivalent to 13% of GDP in 2016. Their performance therefore impacts directly Sri Lanka’s competitiveness and the achievement of its socio-economic development objectives.
But do we know how citizens feel about the service provided by their public enterprises? The World Bank together with our Government counterparts wanted to get a citizen’s perspective on their public enterprises; so we launched an opinion survey. What we found was both interesting and in some cases perhaps unsurprising. A summary of the results showed that a) many Sri Lankans aren’t happy with the performance of public enterprises – 38% think they perform poorly, while 36% think that the quality of services provided are very poor.
We also asked them to list the top reasons why the performance of public enterprises should be reformed. The leading reason was to improve the quality of essential services. They also cited issues with political interference; and need for better corporate governance. So, as I said at the beginning beneficiaries of good/bad governance do not need to be specialists; they just need to be recipients of its impact.
Governance of public enterprises also has an impact on fiscal costs and fiscal risks. Many State-Owned Enterprises reported significant and persistent operating losses, which will need to be covered, generally at the expense of core social programs. Between 2012 and 2015, the net transfers from the State to Public Enterprises amounted to Rs. 460 billion, more than the health budget of Rs. 380 billion. And these losses haven’t stopped; Apart from financial sector institutions, the State is contributing more to its commercial public enterprises than receiving from them. It is also exposed to growing liabilities, through guaranteed and non-guaranteed debt, equivalent to 12% of GDP, not counting other contingent liabilities.
Evidence shows that a good corporate governance system is associated with benefits for all companies, whether private or state owned. In Malaysia, a program aimed at transforming government-linked companies, now in its seventh of a 10-year program, has contributed to improving performance. The return on equity of 20 large companies rose from 7.7% in 2009 to 10.5% in 2010, while total shareholder return grew by 16.4% from 2004 to 2011.
A 2011 study of 44 Public Enterprises in the water and electricity sectors of countries in Latin America and the Caribbean finds a positive correlation between six dimensions of corporate governance reform such as the legal and ownership framework, the composition of the board, the performance management system of the enterprise, the degree of transparency and disclosure of financial and nonfinancial information, the skills of staff, and the operational performance of the utilities.
We therefore fully support the efforts of Parliament, Government, the Human Resources Development Council and civil society, to improve the governance and performance of public enterprises. Success will require a collective effort; and I am heartened to see so many stakeholders coming together to support this important reform.
I hope you will allow me to lay out what we feel could be a few critical next steps to better governance in public enterprises – my wish list, so to speak:
a)Firstly, future consideration of good governance of public enterprises must apply a holistic approach – realigning and strengthening the State’s ownership and oversight function; which includes improving performance monitoring and evaluation; transparency and accountability; corporate governance, and the capacity of Boards and their senior management.
b)Secondly, increase their ability to compete – competition raises the performance bar
c)Thirdly, improve the business environment in which they operate. Provide opportunities for sharing lessons; creating feedback loops between service deliverer and recipient; and rapid course correction when needed.
d)Fourthly, modernise the accountability framework – and reduce unnecessary external and political influence.
e)Fifthly, improve the legal framework through a PFM Act;
f)Lastly, establish a central clearing house that brings together consideration on investments, revenues, budgetary considerations – resulting in better fiscal considerations and management.
It is against this backdrop that we very much welcome the timely release of the Handbook for Corporate Governance of Public Enterprises, which reflects upon internationally adopted principles and good practices. Every stakeholder – from the individual, the NGOs, the government, and private sector – must read the handbook, identify actions and implement them. The handbook is an important tool; but unless it’s used its impact will be minimal.
The Handbook complements well the capacity building framework for Public Enterprises jointly developed last year between the Ministry of Public Enterprise Development, the Institute of Chartered Accountants, the Institute of Management Accountants and the World Bank. This work and the Handbook will inform a certification program with the Ministry of Finance, the Sri Lankan Institute of Directors and IFC for Board leadership.
Let me end by congratulating the host, Dinesh, and respected participants for this event. This event marks an important start to a dialogue – and hopefully action. Its focus on why we should care about better governance of public enterprises; what can be done to improve on a solid base that has been laid out; and how each concerned stakeholder can assist in the process is poignant. Ultimately, everyone wants better service delivered at value for money; in a timely manner and at high quality. That to me, as a layman amongst many is what good governance means to us. We experience the impact. That’s why we should all care.
We look forward to continuing to partner with the various entities that have been involved in the Handbook’s creation; the Government, concerned and interested stakeholders. I would like to also acknowledge the Australian Department of Foreign Affairs and Trade which has been instrumental in supporting our activities on improving good governance of public enterprises.
(Dr. Idah Pswarayi-Riddihough is World Bank Country Director for Sri Lanka and the Maldives.)
