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The government has made it clear that it will not privatise state-owned enterprises (SOEs). Operating them efficiently as state enterprises is a formidable challenge fraught with considerable difficulties and macroeconomic risks.

IMF condition

The IMF required loss-making state enterprises to be privatised. It is not insisting on this condition. Instead, it wants them to be managed efficiently.

Formidable task

Achieving efficiency in SOEs so as to not incur losses is a formidable challenge. The government is confident that SOEs could be run efficiently and not incur losses as in the past, though some SOEs would be run not for profit but for providing a public service.

Government policy

Finance and Planning Deputy Minister Harshana Suriyapperuma outlined the government’s SOE policy recently. He said the government would retain ownership of SOEs and manage them efficiently in different modes of management “for the benefit of the people.”

New approaches

The government has reimagined a model to blend public and private sector strengths for economic growth and will “shift away from outdated models toward a dynamic blend of public-private partnership (PPPs).”

Approach

Speaking at the Sri Lanka Economic Summit of the Ceylon Chamber of Commerce, Dr. Suriyapperuma outlined the government’s approach that neither fully embraces nor rejects the involvement of the government in business.

Instead, it “capitalises on both public and private sector strengths to supercharge growth, unlock untapped potential, and embrace reforms to boost the economy.”

Dr. Suriyapperuma emphasised that the focus should not be solely on whether the government should engage in business but on the efficiency and governance of SOEs.

Services

He said that government involvement can be instrumental in providing services that are either unprofitable or neglected by the private sector. Once these sectors mature and attract private players, the government might no longer be necessary.

Furthermore, he explained that the “government needs to operate businesses that are efficiently managed and focused on delivering services that the private sector may not be interested in or may deem unfeasible.

Potential

Dr. Suriyapperuma stressed the potential for PPPs as a means to boost the performance and scale of SOEs. These partnerships would allow private investors to inject capital and expertise into areas where the government can still hold a stake, while boosting the entities’ efficiency and competitiveness.

Private investment

Acknowledging that some SOEs are currently profitable but have untapped potential, he hinted that inviting private investments could unlock new opportunities both in terms of profitability and market reach. The government is also exploring how SOEs can contribute more effectively to the economy by attracting new investments or expanding into new markets.

“People have tasked us with finding the best solutions for the country, not just serving the narrow interests. This is why we are confident that the forthcoming negotiations with stakeholders will be more constructive, he said, adding that the government’s approach would be flexible.

“Although some SOEs would remain in public hands, others might be restructured or handed over to the private sector to enhance efficiency and profitability. Moreover, new entities would be created to harness previously untapped resources with an emphasis on sustainable development and innovation,” he elaborated.

No burden

He categorically stated that SOEs should not be viewed as a burden. “We see SOEs as vehicles for national growth. Whether they remain SOEs, become PPPs, or go into private hands, the goal is to maximise their contribution to the economy. This resolve may have been the reason for the IMF not insisting on the privatisation of SOEs.

Another model

Dr. Suriyapperuma also mentioned a fourth model of public-private-people partnership, which would incorporate community stakeholders in the development process and thereby ensure that reforms benefit layers.

Practical difficulties

His exposition was impressive and comprehensive. However, it was idealistic and did not take into account the practical realities of SOE operations. One is reminded of the old saying, “The proof of the pudding is in the eating.”

Challenge

Now the government has a huge challenge of ensuring that SOEs are run efficiently. This is no easy task, as the reasons for their loss-making are many and difficult to rectify.

Incompetence

Many SOEs have incompetent and corrupt heads. Their replacement by honest and competent persons are vital. This is the easiest of tasks. It only requires the good intent of the government. Already there have been some good appointments as heads of SOEs.

Management

These enterprises must be managed by boards of directors who must ensure that they are run efficiently and responsibly, as in the private sector. Will the government entrust these enterprises to such competent and responsible, business-minded technocrats?

Overcrowding

The reduction of excessive and incompetent staff in state corporations is a far more difficult task to achieve. SOEs have large numbers of incompetent workers as they have been job banks for ministers and MPs over many years. How will the government downsize these and make their workforce competent, efficient, and hard-working? Political compulsions and trade union actions are serious impediments to their restructuring.

Non-profit

There are good reasons for certain SOEs to be run not for profit, but for the public good and social welfare. Rail and bus transport should not be run at a profit. They should provide services that benefit passengers in remote areas where private buses will not serve at an operational loss. People in such areas need to be provided with transport facilities. This is especially so in respect of schoolchildren.

Railway

Similarly, there is a large workforce that travels to Colombo daily for employment. They travel from distant places like Galle, Kandy, Chilaw, Kurunegala, and Ratnapura. They are able to travel to Colombo owing to the cheap season tickets.

Electricity

The pricing of electricity too should be done on the basis of national interest and social welfare. The criteria for efficient operation of the Ceylon Electricity Board (CEB) should not be profit. Electricity pricing should be on the basis of economic benefits, social needs and welfare. Efficiency should be judged on the criteria of the cost of generation.

Low tariff

There is a rationale to charge a low tariff on electricity for industrial purposes. The price of electricity for industry is high compared to other countries. There should be a subsidised price for export industries to make our exports more competitive as well as to attract foreign and local investment for exports.

The pricing of electricity for domestic use should be progressive. Homes consuming low electricity should be charged a low price, while high domestic consumers should be on a high tariff. This may have an additional benefit of conserving electricity consumption.

Conclusion

The decision to not privatise SOEs should not result in an increase in public expenditure that derails fiscal consolidation. It confers a huge responsibility and enormous challenge to transform them into efficient enterprises. The success or failure will have significant financial implications for the economy. While all SOEs need not be privatised, not privatising many of them could prove to be a serious economic error.