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Reform or privatise loss-making public enterprises
View(s):The uproar against the electricity price tariff increase has brought to the forefront, inter alia, issues regarding the management of the Ceylon Electricity Board (CEB), its persistent losses, pricing of electricity and priorities in government expenditure.
The public interest about the administration and efficiency of the CEB should be broadened to a concern on the efficiency of all public enterprises.
Losses in public enterprises are a critical economic issue. There should be a continuing discussion on the causes of the large losses in public enterprises with a view to their reform and whether the services of public utilities should be subsidised and how. Such losses are a burden on the public. Who should bear them?
The increase in electricity tariffs should draw attention to the massive losses of public enterprises that are a serious fiscal burden. It should also lead to a broader discussion of efficiency of state enterprises, principles in subsidising state enterprises and changes in the systems of management of public enterprises. Should the pricing policies reflect costs? Should consumers pay for inefficiencies? Should losses be borne by the tax payer?
Inefficient public enterprises
Political intervention is a key reason for the inefficiency of public enterprises. They employ larger number of employees than needed; recruitment is often not on the basis of efficiency but political patronage;worker discipline is poor and productivity low. There is also much corruption and waste. There are political interventions in running state enterprise that are costly and uneconomic. State enterprises are often asked to contribute money for political activities. All these contribute to high costs of services and losses.
The extents of political interventions vary with different regimes, but are a feature of state run enterprises under all regimes. Such interferences are a feature all over the world but more so in South Asia. Singapore is an exception due to the incorruptible leadership, professionalism in running state enterprises and noninterference. Yet the government privatised the well-run Singapore Airlines some years ago to improve efficiency.
Large losses of public enterprises are not new. They have been an endemic problem for many years. Even the state plantations ran huge losses that affected the government’s finances, threatened the viability of state banks and crowded out finance to the private sector.
No state-run corporation in Sri Lanka has been efficient when assessed in the proper way that includes the initial investment costs and the rates of return are estimated on discounted cash flow basis using appropriate interest rates and future prices. Public enterprises have no incentives to innovate, cut costs and deliver an increasingly attractive service.
Losses a fiscal burden
Last year’s losses in public enterprises that amounted to Rs. 185 billion are a major reason for the large fiscal deficits of the government. Last year the fiscal deficit of 6.4 percent of GDP was higher than the 6.2 percent GDP deficit it had targeted. One of the main reasons for this was these losses of public enterprises. It would be difficult for the government to achieve its fiscal deficit target of 5.8 percent of GDP this year, if losses of public enterprises remain as large. The large fiscal deficit is in turn a cause for economic instability.
The current debate and discussions on the electricity tariff increases have resulted in considerable discussion on the efficiency of CEB.It is also necessary to focus on the efficiency of the other public enterprises as well. The Ceylon Petroleum Corporation (CPC) had an operational loss of Rs. 89.7 billion in 2012, only about Rs. 5 billion lower than the Rs. 94.5 billion loss in 2011.There have been very many questions raised about the operational efficiency of the CPC as well.
The two state-run national airlines also suffered losses. SriLankanAirlines suffered a loss of Rs 20.5 billion in 2012. Mihin Air, whose operations are limited, also incurred a loss of Rs.1 billion. Sri Lanka Railways (SLR) decreased its operating losses from Rs. 4.1 billion in 2011 to Rs. 3.8 billion in 2012. In contrast, the operational loss of SLTB increased to Rs. 3.3 billion in 2012, compared to the loss of Rs. 3.1 billion in 2011.
The Department of Posts that provides essential services too incurred significant losses, though much less than those of the large corporations. The Department of Posts registered a loss of Rs. 5 billion in 2012 owing to a substantial increase in salaries.
In several of these corporations, especially the larger ones, they have incurred debts to state banks. These would also fall on the public purse sooner rather than later. Therefore the burden on the public as a result of inefficiencies and losses is massive and onerous.
The reasons for losses in state enterprises vary. There could be justification for subsidisation of some services, either for economic or for reasons of social equity, but subsidies on others are quite unjustified. There is therefore a need to investigate and find out the inefficiencies and mismanagement in public enterprises whose losses have to be borne by taxpayers in different ways.
The discussion of all state enterprises that are loss making should be to enhance their efficiency, decrease losses and improve their services. There could be a case for some public enterprises to run at a loss and to subsidise essential services. However this justification for subsidies must be based on efficiently run government services. There is a case to subsidise operations of some state enterprises so as to offer the service at lower cost to the public. Such subsidisation of essential services could have economic and social benefits. An example of such subsidisation is transport. It helps keep the costs of living down. Yet, there must be efforts to run these enterprises efficiently and provide a better service than at present.
In contrast, there is no justification to run airlines at huge losses. There may not be possibilities of increases in fares, as there is competition among airlines, both in fares and service quality. Therefore operational improvements are needed to reduce losses.
Privatisation
The inevitable conclusion from the above discussion is that there are inherent reasons why the state cannot run business enterprises efficiently. Therefore one way of improving the efficiency of these services is to privatise them. However the Government has declared that it would not privatise public enterprises. Within such a political and ideological context, the only option is to reform state enterprises. There may be limited scope to reform public enterprises.
Yet the gravity of the fiscal problem makes the reduction of losses in public enterprises imperative. They must be reformed to deliver their services efficiently and if at a loss, lower losses.
Most commissions and committees have served little purpose. Yet, a commission responsible to COPE to explore the reasons for losses and recommend ways and means of cutting losses is needed. The gravity of the problem should generate a political will to reform state enterprises as continuing losses of the current scale could jeopardise the stability of the economy and lead to an economic crisis.
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