Mahoshada

“I am not willing to swallow that bitter pill [privatisation] even to turnaround loss making enterprises.” President Mahinda Rajapaksa

The massive drain on the country’s resources by the large and highly inefficient state owned enterprises (SOEs) constitutes one of the major hurdles to reducing poverty and accelerating economic development. At a government seminar held in Colombo several weeks ago, the Secretary of Treasury, Dr P. B. Jayasundera, reported that the total annual loss by SOEs amounted to some Rs 24 billion rupees. In other words, the direct losses alone cost the average family of four nearly Rs 5,000 every year. But as Dr Jayasundera made clear – this is just the tip of the iceberg.

In addition to the losses that have to be met by the government, the total liabilities and debts of these SOEs are another Rs 50 billion. For the average family of four, this amounts to another burden of more than Rs 10,000, which must be paid off sooner or later. In addition, for as long as this debt remains unpaid, there are additional interest charges that must be met by the government. And as the annual losses continue to increase, so too will the SOE debt burden.

But the true total costs of these hugely inefficient enterprises goes well beyond their ever growing annual losses and debt. Understandably, these are the immediate concerns of the Treasury, which has to find the money to pay the bills. While some of these additional costs are difficult to estimate with much accuracy, there is no doubt that they impose a massive burden on the economy. Consider the following hidden or indirect costs, for example:

High costs and poor quality of services: It is well known that the cost of electric power in Sri Lanka is amongst the highest in the world. To make matters worse, these costs are continuing to rise at an alarming rate. It would be fair to say that the difference between what a family now pays for electricity and what it would otherwise pay, if the CEB operated efficiently is also part of the burden imposed by these poorly managed enterprises.

Dr Jayasundera indicated that among the four major loss making SOEs were the Ceylon Transport Board and the Railways. These days bus and rail transportation are notoriously unreliable, uncomfortable and unsafe, providing the riding public with very poor quality services. Although the fares being charged are generally low, passengers are actually indirectly paying more through their taxes used to meet the losses of these SOEs as well as having to put up with the very low standards of services.

Costs of “fixing” these enterprises: How much money has the government sunk into various efforts to improve the efficiency of these SOEs over the years? It seems that every government comes into office with promises to turn these huge losses into profits while improving services. It was only a bit less than two years ago that the Strategic Enterprise Management Authority (SEMA) was formed with the task of rapid reform of these SOEs. Large amounts of money were spent as part of this exercise, yet it seems that things have only gotten worse.

Today this task falls to the Ministry of Skills Development and Public Enterprise Reforms, which recently spent substantial sums to organize a major seminar on the topic “Public Enterprises: Performance, governance, and best practices – strategies for success”. International experts were brought in to deliver the message that management needs to be improved and workers need to work harder in the SOE sector. Like SEMA before, the officials currently responsible for improving SOE performance seem to hold out the prospect that somehow all of these problems can be made to painlessly disappear without actually introducing any politically challenging changes – in other words, a “sugar coated pill”.

Costs of missed investments in essential social services: One point that is rarely mentioned is that while the government has invested massive amounts over the years in what are meant to be commercial enterprises, urgently needed investments in social capital, such as infrastructure, schools and medical facilities have largely been neglected.

The first question to ask in this regard is whether public investment in commercial activities such as power generation, transportation, petroleum marketing, etc has yielded higher total social and economic returns to the country than investments in infrastructure, health and education would have? Certainly, from any reasonable financial or economic perspective, most of the investments in SOEs have shown very low or negative returns. On the other hand, most assessments of the expected social and economic returns on increased investments in infrastructure, health and education would actually be quite high. Therefore, a major cost of maintaining the huge financial investment in SOEs has been the difference between the potential high returns in the missed investments needed in essential social services and the low or negative returns on SOE investments.

A second important point is that in some areas public investment could readily be replaced by private investment. It is not the case that if the government did not invest in sectors such as power generation or public transportation, these services would not be available. These types of commercial services can usually attract substantial private investment if the overall investment climate in the country is sound. In contrast, it is generally somewhat more difficult to attract private investment for schools, roads and medical facilities – although it is not impossible, (e.g., as demonstrated by Apollo Hospital, several international schools and colleges).

By undertaking major investments in SOEs the government has essentially blocked much potential private investment in these commercial activities, leaving much less money available for investment in other much needed areas. Virtually everyone agrees that substantial increased investments will be needed in infrastructure, education and other social sectors if the country is to reduce poverty and accelerate economic development. These resources were available, but not utilized.

To Privatise or Not?
President Rajapaksa, cited above, says he is determined to avoid the “bitter pill” of privatization. However, at the same time he also said that “public enterprises must improve efficiency, governance and commercial viability and serve the people beneficially instead of being a burden on the Treasury and public.”

Focusing on the question of whether or not to privatise the major SOEs actually misses the central point. Before we can know whether the “bitter pill” is the only viable alternative, we need a better diagnosis of the disease actually plaguing these enterprises. And there can be little doubt that at the root of the problem has been the persistent and substantial interference in the commercial operations of SOEs by governments. Politicians have long seen state enterprises as a ready means by which to reward their supporters, whether by providing jobs or through overly generous contracts. As a result, virtually all SOEs have far too many unqualified workers on their payroll to be able to operate profitably.

There are cases where state owned enterprises have been able to operate competitively and generally be profitable. Singapore provides numerous examples, where there are numerous very successful state enterprises. But that is largely because they are able to operate without any government interference.

Therefore, the real question ought to be: What are there are measures that could be introduced that would ensure that SOEs would remain immune from political interference? Understandably, this is not a question that many politicians are interested in pursuing vigorously. But unless effective ways are found to ensure autonomy, including the ability to reduce bloated workforces, and give managers the appropriate incentives to maximize profitability, the financial burden of the country’s SOEs can only be expected to continue to grow.

It would appear that any alternative to privatisation that actually kept the government’s hands off of the enterprises in their charge would be an equally “bitter pill” to the politicians in power. Implementation of such measures would require a selfless act of political maturity in the national interest, something not often seen. It is not impossible that this could happen, but it does seem unlikely.

The attractiveness of privatisation as a solution to the enormous waste associated with SOEs is that it does, once and for all, move these enterprises out of the reach of interfering politicians. At the same time, it provides the state with much needed resources that could be invested in other areas where there are pressing social and economic needs.

Name and Shame?
At the government’s recent seminar on SOEs, the President seemed to offer as a step toward reform what amounted to little more than a “placebo”, a sugar coated pill to give the patient the impression that real treatment would be given. He said: “We have over 300 SOEs and the government will launch a program to monitor their progress and end of the year we will announce the best SOE, Best Chairman and Board of Directors to encourage best practices and success. At the same time we will also expose the worst SOE, Chairman and Board of Directors.”

One would presume that the government is already monitoring the performance of all 300 SOEs and could today publish the respective records of their managements. As the true shareholders in these enterprises, the public ought to have this information provided on a regular basis in any case. It is only that the public can come to a well reasoned decision as to whether the “bitter pill” is the right medicine or not.