Financial Times

Avurudu blow for Sathosa
Privatisation … restructuring … reforms – call it what you may but the full or part sale of government assets was once considered the panacea for poor management and curbing losses in state organisations.

It still is – as long as it’s properly done. The saga of Sathosa, the ailing state-cum-private sector giant supermarket chain, as reported on the previous page shows how a near-perfect exercise of privatisation failed – and in this case because of the change of governments. The chain is the retail arm of the CWE while the wholesale section remains in full state control.

The retail chain in which the government has a 60 percent stake while the balance is held by a consortium (IGA) is on the verge of collapse if the government doesn’t respond to an offer by the other shareholders.

Sathosa is (or has been) the people’s marketplace, as some consumers call it, with reasonable prices catering to low-income groups and providing a range of low-cost goods. The debt-ridden organisation desperately needs a lifeline in the form of Rs. 300 million mainly to fund a VRS (Voluntary Retirement Scheme) to lay off 1,200 to 1,500 workers.

Without this the company will sink, IGA says. Now why didn’t they think of this, before taking over the organisation? Well, a VRS was part of the deal between the government and IGA when the 40 percent stake was sold in end 2003. In fact the Cargills group, the most experienced in the supermarket business here, was the first choice in this deal until the then Trade Ministry decided – in a subsequent addendum to the bid – to increase the number of workers employed at Sathosa Retail. It was then that the IGA won the tender.

Just as the IGA, which has full management control of Sathosa, convinced the Sathosa directorate headed then by Lal Wickrematunga to plough in Rs 180 million as the government contribution in a rights issue, the government changed hands in April 2004.

Still IGA was able satisfy the new directorate chaired by Upali Gunaratne under Minister Jeyaraj Fernandopulle on the need for the new infusion of capital and the shedding of workers. However a few weeks after the Gunaratne-led board agreed to the deal, government nominees reversed their decision on the basis that the government didn’t have the money or that it was not viable.

That’s how it stands today – lack of new capital to turn around the company. Last week IGA directors gave an ultimatum to the government – either take over full management of Sathosa Retail while IGA retains the 40 percent stake or buy back this stake and return the more than Rs 600 million that was invested.

Fernandopulle has said he is convinced the government can make Sathosa profitable again and seems keen to take over management. What experience he has in doing business, no one knows. But what is certain is that if the government is to re-run Sathosa that would be an even bigger disaster.

It's clear that the biggest problem Sathosa has is excess staff and too many loss-making outlets. Shed the fat, that’s what the IGA wanted. Would Fernandopulle – who seems to be getting into all kinds of problems like the tangle over Prima – shed excess staff? It might be the reverse – more staff and hangers-on would be brought in creating more problems.

Remember that other supermarkets, particularly Cargills, have been giving Sathosa a run for their money with equally, competitive pricing and any attempt by the government to run the giant chain would be foolish and fail miserably.

The government can’t do business. That should be left to the private sector.
On the other hand, industry sources say, the IGA-led management should also share the blame for the collapse of the institution due to a poor market mix of goods. In some faraway places, Sathosa had products like imported cereal and a range of imported milk food which is beyond the reach of the common man or woman. We are not for a moment suggesting that the lower middle class or poor shouldn’t have access to these goods but there should be some rationale in the product mix.

When the new managers wanted to offer a VRS and reduce staff as they had planned soon after taking over, the company was persuaded to delay this process as it would have been embarrassing to the government! If this exercise was done at that time, Sathosa would probably be in a better position to serve the people particularly during this festive season.

While the rich and famous stock away during Christmas with supermarkets like Cargills and Keells Super being their hunting grounds, the lower classes empty the shelves of Sathosa during the Sinhala and Tamil New Year. March is normally the best month for Sathosa.

Sadly the bells have tolled this month for the ailing giant. The die is cast and another state institution that served the people has been ground to the dust in a private-public experiment that turned sour.

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