Restructuring SOEs
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When Emirates exited in March 2008 from its arrangement to manage SriLankan Airlines and did not seek to renew the partnership arrangement owing to a tiff with the then President Mahinda Rajapaksa, the airline had made a profit of nearly Rs. 5 billion that year to March 2008.The very next year saw the airline under state control reporting a loss of Rs. 9.9 billion in the financial year ending March 2009.
Then just before the state-owned Ceylon Tyre Corporation sold its Kelani Tyres PLC to India’s CEAT company, there was turmoil and union unrest over the impending move in 1993. The government refused to budge and eventually Kelani Tyres was listed on the Colombo Stock Exchange and sold. The company is now the largest tyre maker in the country and running successfully without any debt.
At another state company which was a hotbed for corruption, its directors tried to turn it around and reduce the waste, but were subsequently eased out and the corrupt allowed to flourish.
These examples emerged this week at an interesting discussion on SOE (state-owned enterprises) reforms which the government has promised to undertake under the fast-tracked International Monetary Fund (IMF) bailout package of US$2.9 billion.
The panellists at the discussion hosted by the Sunday Times Business Club were Dr. Roshan Perera, former Director – Central Bank/Senior Research Fellow Advocata Institute; Ravi Abeysuriya, CEO/Director Senfin Securities Ltd.; and Shiran Fernando, Chief Economist, Ceylon Chamber of Commerce.
As I sat down to write my column on the topic of SOE reforms, which are vital to the country to cut waste and inefficiencies and restart the economy, the phone rang. It was Ruwanputha, my young economist friend, on the line.
“Hello, I wanted to pick your brains on SOE reforms since I recall you wrote a column on this topic a few weeks ago,” he said.
“You are right, and interestingly I am writing another column this week on the same issue,” I said.
“How many SOEs would be restructured?” he asked.
“The Sri Lankan authorities are on the verge of privatising or restructuring 430 state institutions which are both loss and profit-making institutions to enable better management and less of a burden to the state. Of these, 52 institutions are said to be critical and in need of immediate restructuring,” I said, adding that these include the Ceylon Electricity Board, SriLankan Airlines and Sri Lanka Telecom.
“Does the government have the political will to resort to SOEs reforms?” he asked.
“That’s an interesting question. If we don’t reform these organisations, the IMF programme would be scuppered and lead to all kinds of fiscal problems,” I said.
Meanwhile, among the questions posed to the panellists at the discussion I referred to earlier were – What is the reason for the government to restructure many SOEs? Will it attract investors if the debt burden is high or will privatisation be offered without an investor taking up the debt? Show examples of past SOEs privatisation that were successful: Will the revenue from the sale of SOEs be sufficient to meet Sri Lanka’s foreign debt commitments if that is the criteria for selling? What happens to the workers in these entities? Will the new investor be given the option of new hires or retaining the same number of workers without rationalisation of staff? And what are the most attractive SOEs that would garner private sector investment?
In response, the panellists said that the biggest deterrent to privatising or selling inefficient and loss-making state enterprises were politicians (as they fill these institutions with their supporters when in power) and the unions who lose their clout when enterprises are sold. In the case of regional plantations where the management was privatised in the early 1990s, the unions still continue to call the shots.
The panellists also noted that most state institutions are inefficient; investors will want to right size the workforce and thus may offer VRS to reduce the companies of excess staff; debts run into millions; most investors would want to take less debt but these are up for negotiation; political will is required for SOEs reforms; it is in the interest of everyone that these loss-making institutes are sold; the
Government is planning to float a holding company that would bring in these companies under one umbrella like examples in Malaysia and Singapore and ideally be sold through the stock market; IFC is the transaction advisor in some of the state reforms.
In an earlier column on privatisation, I wrote that to some, SOEs reforms are a scary thought; to others it’s a means of promoting competition and giving customers value.
As I reflected on these issues, my attention was drawn by the conversation under the margosa tree. “Den kathawak thiyenawa aanduwa balaporoththu wenawa kiyala viduli bala mandalaye kotas vikunanna. Ethakota ape light bila adu wewida (There is talk that the government is considering selling parts of the CEB. I wonder whether this would help reduce our electricity bill),” said Kussi Amma Sera.
“Apita podi prathilabayak thiyenawa indana mila adu karapu nisa brahaspathida. Eh wage nithara nithara wunoth hondai (There seems to be some benefit from fuel prices which were reduced on Thursday. I hope this will happen more frequently),” noted Serapina.
“Elavalu mila adu wei thavath pravahana gaasthu adu wunama (This should reduce vegetable prices further as transport costs come down),” added Mabel Rasthiyadu.
Privatisation of import and distribution being undertaken currently would see the Ceylon Petroleum Corporation only having 400 fuel stations to run, compared to 800 that would be managed by private companies under the current reforms. This means CPC trade unions won’t be able to disrupt distribution with hitherto lightning strikes.
As I wound up my column, Kussi Amma Sera walked into the office room with my second mug of tea saying: “Indana mila adu wena eka hondai (It’s good that fuel prices are coming down).”
I nodded my acknowledgement realising that the sale or management given to the private sector of loss-making SOEs would usher in a new era of prosperity for the nation.
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