A case for privatisation

Originally appeared on The Morning

By Dhananath Fernando

While many agree on the need to reform State-Owned Enterprises (SOEs), several counter arguments remain.

There is one main argument that is reasonable: how can we be assured that corrupt politicians will make transparent transactions? The weaknesses in the previous privatisations have completely affected the confidence of the public.

On the other hand, the positive results of privatisations in cases such as Sri Lanka Telecom (SLT) are very clear. Costs have decreased while productivity and quality of service have significantly increased, and the Government has made money.

However, SLT was a partial privatisation, with the Government having the larger share of 49.5% in the company. This oversight that the Government has over the telecommunications company has once again demonstrated that it is not operating to its full potential when compared to competitors.

This is not surprising, because there is a window for corruption and favouritism when politicians have control over the administration. An article published by Sanjeeva Jayaweera, who is the Chief Financial Officer of one of Sri Lanka’s largest conglomerates, revealed some comparative statistics on the telecom sector.

This market leader, a privately-owned telecom company with more than 17.7 million subscribers, manages the operation with about 3,631 staff members and has a wage bill of Rs. 10 billion for 2021. On the contrary, SLT operates with 8,058 employees, serving about 9.3 million subscribers and has a wage bill of about Rs. 20 billion for 2021.

This is a clear indication of the space available for political appointments and usage of excess resources from the economy. The private market leader generates a revenue of Rs. 142 billion and SLT makes about Rs. 102 billion.

The average dividend income earned by the Government over the last five years is only about Rs. 1.1 billion.

Passive earning

What many forget is that the private sector making more money on a competitive basis is very much beneficial to the Government on a large scale, rather than the Government trying to do business in an unknown territory, which also results in politicisation.

A private company has to pay 15% of its entire revenue and 30% of its profits to the Government. The Government earns a significant amount of money from businesses by doing nothing. Therefore, there is no logic in intervening in markets and bearing an unnecessary burden when there are options to earn money easily.

The Government can earn even more money through PAYE taxes when employees of a private company earn more than Rs. 100,000. Accordingly, the total amount the Government earns from businesses is quite significant. Hence, it is more lucrative for the Government to hold a regulatory role rather than to engage in business.

Unfortunately, Sri Lanka does not have a competition commission. It was reported that Sri Lanka’s market leader in telecommunications was planning on acquiring another company in the market. Ideally, this transaction should go through a competition commission to evaluate the impact on customers. Sadly, Sri Lanka does not have a competition commission; nor does the competition law include or address mergers and acquisitions.

In the process of privatising, it is vitally important to have independent valuations for the company and manage the transaction transparently with no unsolicited proposals. The bidding process must be competitive and the balance sheet has to be improved to reap the maximum benefit.

According to Jayaweera’s estimation, taking an average of the share price (prior to shares becoming overvalued by privatisation discussions), the Government should be able to earn about Rs. 50 billion by trading shares. If the Government were to earn that money through dividends, it would take about 50 years. If Rs. 50 billion is invested at 10% interest, it should provide a return of Rs. 5 billion to the Government, which is five times the current earning through dividends.

National security

The second argument is on national security. This is a common argument made by politically-appointed boards of SOEs, trade unions, and affected shareholders. However, this argument has questionable logic – government ownership and operational management does not automatically ensure national security.

For example, even though the Government operates the petroleum and electricity markets, we still experienced fuel shortages and 12-hour power cuts. In the 2000s, there was a case of importing substandard fuel and during the Yahapalana regime there were fuel lines due to supply chain disruptions. If you recall, there were also times when the internet was blocked during the Aragalaya.

Even during the Yahapalana era, the internet was blocked on several occasions over national security concerns. However, even with prior warnings by the Indian intelligence services, we were unable to avoid the Easter attacks.

Therefore, if we consider facts and logic, national security has a broader mandate which goes beyond arguing that sectors such as energy and power have to be managed by the Government. Even then, petroleum products are not manufactured in Sri Lanka. We are merely importing them in vessels not owned by the Government.

Simply having control over the distribution channel does not ensure national security when the ships and entire supply chain can be interrupted by many others. The same applies for electricity and telecommunications – all high-tech equipment is supplied by multiple countries and interruptions can occur at any point.

The resistance to SOE reforms is driven more by emotion than logic. In a context where we are emotionally attached, rationale does not make any sense. But the challenge is that emotions do not count when we consider the facts and figures of the economic crisis. Unfortunately, emotional attachments cannot rescue Sri Lanka from the crisis. I wish they could.

The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.

Privatisation! the need of the hour

Originally appeared on The Morning.

By Dhananath Fernando

I travel mainly by a common staff transport from Moratuwa to Colombo to work. I travel by train as well as on normal public transport for other travel purposes. Undoubtedly, my staff transport is the most efficient and affordable, providing the most value for money. It not only provides value for the money I pay, but it also provides a great example of why the Government should not do business and why the private sector should be allowed to. Even in the toughest conditions, private enterprises can bring solutions.   

The operator of my private staff transport is Amal, an executive at an office in Colombo. While a normal bus typically has three main stakeholders, Amal has made it so that there’s just one main stakeholder. That’s efficiency. A normal bus on the road generally has an owner, a driver, and a conductor. Amal just has one. He is the driver who drives us all safely and on time. He does not have a conductor because he has an automated door which the driver can operate easily with just a switch in the dashboard.

He charges about Rs. 12,600 for an air-conditioned bus ride for the entire month. That is approximately Rs. 286 per one-way journey from where I live, which is around 20 km. If I were to calculate my cost per kilometre for a peaceful air-conditioned bus ride where I can sleep comfortably or work on my computer, it costs just Rs. 14. 

Even if I travel by a normal non-air-conditioned bus, the incremental value I pay for Amal is negligible. If I use an air-conditioned bus, my costs are higher than what Amal charges. In the first place, there are no air-conditioned buses where I live and with Amal, my travel time is almost one-third of the total time taken on the normal route. I believe that travelling with Amal not only saves time but also reduces carbon emissions as well. 

A win-win situation 

Amal is just one man in the private sector who adds value to my life while making a profit and a living out of it. He recently bought another bus and now he has two rosters both ways with a time gap of about 30 minutes, meaning I can choose either the first bus or the second according to my convenience. He shares the live location on WhatsApp before every ride, so I can track where the bus is and be prepared. 

Amal is not the only such person. If you observe Colombo between 7-9 a.m. you will notice that there are many buses operating on the same model as Amal’s. There is no regulatory authority on staff transports in Colombo and yet it operates efficiently, with both Amal and I being beneficiaries of the system. It’s a complete win-win. I hope that after reading this article, there won’t be any Government regulations set up regarding staff transport to ruin the market. 

Amal is a one-man private operator who solves a burning issue for me or at least provides me with a reasonable solution which my Government has been unable to provide for more than three decades, even with billions worth of funds.    

Amal can improve efficiency because he has an incentive for improving efficiency. His incentive has a ripple effect leading up to minimising carbon emissions. 

Privatisation to solve problems

Given the discussion on privatisation, there is no better example than Amal of how private enterprises help people. Economics and businesses are all about solving people’s problems. Our life is all about solving each other’s problems and depending on each other. Amal solves my transport problem and by paying him, I may be contributing money for his child’s education. 

Our entire economy is a complicated yet interconnected web. Efficiency and getting the maximum out of our resources are needed, which can only be done when the markets are in operation. Markets are operated by private individuals like you and me who read this article. 

While the process of privatisation is complicated, privatisation is just a normal process for market operations. Sri Lanka’s economic problem is that we don’t solve anybody’s problems. When we do not solve problems, how can we earn money? How can others solve our problems? 

Problem-solving is nothing but improving efficiency. Efficiency can only be improved when people have incentives. It is a universal truth, like the earth revolving around the sun. Even if you look at the Return on Equity (ROE) or Return on Assets (ROA), which are indications of a company’s efficiency, it is very clear that under normal circumstances and on level playing fields, the private sector’s efficiency and impact is much higher than when the Government runs businesses. 

Just take a look at Figure 1, which is a comparison between Sri Lanka Telecom (SLT), which has some private sector engagement and Dialog, which is a private sector player.

Figure 1: ROE analysis of SLT vs. Dialog

Source: Annual Reports of SLT and Dialog (2018-2021)

In some cases, the State sector ROE is simply higher because of the absence of a level playing field. The banking sector is a good example. Most State banks get preferential treatment so their returns are high due to the non-competitive nature of getting businesses. Given the size of the Government, most Government banking is done through the State-owned People’s Bank and Bank of Ceylon. Anyone visiting a State bank and a private bank will experience the difference in service levels. This doesn’t mean the private sector is perfect; markets are always imperfect, but it is obviously many miles ahead of businesses run by the State.

Figure 2: ROE comparison of the banking sector

Source: State of the State-Owned Enterprises, Advocata Institute (2022)

The private sector is not anyone else, it is us. We should be given the opportunity to solve our problems instead of making the Government solve them. When the Government tries to solve the problem, it will not only block the private sector but it will also waste our tax money. Just think of Amal; he is providing me with a reasonable solution to a problem that the Government has been unable to solve for over three decades.  

The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.

Restructuring SriLankan Airlines can help reduce our economic woes

Originally appeared on The Morning

By Anuka Ratnayake

There is much discussion on the precarious financial situation of the island’s National Carrier SriLankan Airlines. A month ago, Minister of Ports, Shipping, and Aviation Nimal Siripala de Silva revealed that “The only way to rescue the National Carrier is via urgent restructuring” [1].
The airline has racked up significant losses while its debt obligations have increased significantly with the depreciation of the currency. Getting rid of the airline will allow the Government to focus on its limited resources to strengthen social security nets and improve social infrastructure.
The argument regarding the airline has been muddied by emotion, for it is ultimately the people who pay for it and who have the right to ask if this is the best use of taxpayers’ money.
SriLankan Airlines’ Annual Report for 2020/’21 (latest available annual report) provides that the SriLankan Airlines Group recorded a loss of Rs. 49.7 billion. However, the Ministry of Finance in its latest Annual Report records that the loss (before tax) of SriLankan Airlines for the year 2021/’22 is Rs. 170.8 billion [2]. The accumulated loss amounts to Rs. 542.5 billion as at 31 March 2022. The National Carrier lost Rs. 248.4 billion in the first four months of 2022 due to the volatility in exchange rates [3].
The airline is in debt to the Bank of Ceylon and the People’s Bank to the tune of $ 380 million in 2022, while another $ 80 million loan has been obtained from the Bank of Ceylon by mortgaging shares of SriLankan Catering. The banks have extended support to the airline on the basis of letters of comfort issued by the Ministry of Finance.

Further, the airline has a debt payable on an international bond on a Government guarantee of $ 175 million. The guarantees extended by the Government to banks and bondholders represent additional potential losses of public funds. The group owes an arrears amount of $ 325 million to State-Owned Enterprises (SOEs) such as the Ceylon Petroleum Corporation (CPC), the Airport and Aviation Services (Sri Lanka) (AASL), and the Civil Aviation Authority of Sri Lanka (CAASL) [4].
The group’s current liabilities exceeded its current assets by Rs. 214.6 billion by 31 March 2021 and the total equity of the company as at reporting date has declined to a negative Rs. 281.5 billion.
The Auditor General’s report has continuously warned the company that “a material uncertainty exists that may cast significant doubt on the group’s ability to continue as a going concern” [5]. The Auditor General has relied on the Cabinet approval dated 7 February 2022 and the letter issued by the Secretary to the Treasury on 24 February 2022 confirming the support of the Government to the company to continue its operations as a “going concern”. In simpler terms, the SriLankan Airlines Group is technically insolvent and it continues to operate using taxpayer money.
The airline last reported a profit in 2008, under the management of Emirates. It has failed to report a profit in any year since then. The airline industry is known to be a high-risk, low profitability business.

Future losses and lessons learnt from India

The International Monetary Fund (IMF) has now reached a Staff-Level Agreement (SLA) with Sri Lanka to assist its economic recovery process. It was agreed that the IMF would provide an Extended Fund Facility (EFF) of $ 2.9 billion on a 48-month arrangement.
The total debt of SriLankan Airlines (just over $ 1 billion) is nearly one-third of the EFF. Sustaining further losses is an impossible task since the Government can no longer fund the airline. Covering future losses of the airline through tax increases is unacceptable given the dire economic conditions faced by the public.
Sri Lanka needs air connectivity, but this is best provided by privatising air services and not by operating an airline. A good example is the Air India privatisation which took place in the past year. The Indian National Carrier was sold to the Tata Group for the relatively small sum of INR 180 billion [6]. Prior to the sale of the airline, it was losing $ 3 million a day on average, which totaled to over $ 1 billion per year [7].
The rising aviation fuel prices and airport usage charges were not sustainable after the pandemic restricted air travel. Further, competition from low-cost carriers and the poor financial performance of the airline made things worse. Air India’s poor client orientation, lack of punctuality, obsolete productivity practises, and poor revenue generation techniques were among the reasons for its incompetency [8].
The impact of the Air India privatisation was discussed at a panel at the ReformNow Conference hosted by the Advocata Institute. The panellists stressed how the Tata Group had already begun the process of value addition through efficient customer care services, improving fleet productivity, and focusing on budget flights for the domestic market.

Aviation hub

Singapore’s aviation policy has been a key factor in the growth of Singapore’s Changi International Airport, where air transport contributed to nearly $ 20 billion of value added to the Singapore economy or about 6% of the Singapore GDP in 2011.
There is much public support for restructuring SriLankan Airlines due to its heavy burden on State coffers and thereby the taxpayers. However, rather than selling the airline alone, bundling the sale of the airline with the other business units such as SriLankan Catering and SriLankan Airlines Ground Handling would be attractive to investors. At the same time, the airport too can be included and marketed as an aviation package with a similar potential to the Changi International Airport.
A national carrier is a source of pride, but it is not a priority for a cash-strapped Government. The airline should be disposed of or even closed, and a liberal air services policy should be adopted instead.
This could boost growth and truly turn Sri Lanka into an aviation hub, freeing taxpayers’ money to be used for health, education, and other priorities.

References
1. https://www.ft.lk/top-story/Answering-aviation-Aragalaya/26-739243
2. https://www.treasury.gov.lk/api/file/a7a35d1a-556f-49b2-81e0-20294eb5a519
3. https://www.treasury.gov.lk/api/file/bc1e8eaf-91eb-4cb3-94e0-35d81f65a949
4. https://www.ft.lk/top-story/Answering-aviation-Aragalaya/26-739243
5. https://www.srilankan.com/pdf/annual-report/SriLankan_Airlines_Annual_Report_2020-21_English.pdf
6. https://www.indiatoday.in/business/story/explained-air-india-handover-government-to-tata-group-changes-1904217-2022-01-25
7. https://www.advocata.org/commentary-archives/2021/10/11/air-india-sold-privatise-srilankan-now
8. https://www.bbc.com/news/world-asia-india-60150531

Anuka Ratnayake is a Research Assistant at the Advocata Institute. She can be contacted at anuka.advocata@gmail.com. The Advocata Institute is an Independent Public Policy Think Tank. The opinions expressed are the authors’ own views. They may not necessarily reflect the views of the Advocata Institute.

Import controls: Regression when we really need reform

Originally appeared on The Morning.

By Dhananath Fernando

I recall a visit I made to a small eatery back in 2015, just a few weeks after the interim budget speech by the new Yahapalanaya Government. The eatery prepared hoppers, egg hoppers, and short-eats – this was just after the then Finance Minister, in his Budget speech, had announced price controls on hoppers at Rs. 10, egg hoppers at Rs. 25, and, if my memory serves me right, plain tea at Rs. 5 and Rs. 10 for milk tea.

When I asked for an egg hopper, the shopkeeper (‘mudalali’) said: “Sir, we are not selling egg hoppers. If you want, you can buy an egg here for Rs. 17 and give it to the chef and he will put the egg on a normal hopper, which is priced at Rs. 10, and you will get your egg hopper.” I was totally confused and I asked the shopkeeper: “What do you mean? Can’t you give the egg from your counter straight away and give me the final bill?”

He replied: “Sir, because of the price controls we can’t sell egg hoppers at profitable prices. An egg costs about Rs. 17-18. Coconut is also expensive, as are rice flour, wheat flour, and cooking gas, so we can’t sell egg hoppers at Rs. 25. So we sell eggs and hoppers separately.” I then followed his instructions and got the egg hopper prepared.

Generally when buying hoppers, chilli sambol, known as ‘lunu miris,’ comes complementary. I was waiting for ‘lunu miris,’ which did not arrive. I asked the shopkeeper: “Where is my lunu miris?” He replied: “How can we give lunu miris free when we sell hoppers at Rs. 10? You have to buy lunu miris separately by paying an extra Rs. 10.”

Price controls never work

The recently-imposed price controls on eggs will not make any difference to the same set of outcomes I observed about seven years ago. Sadly, Sri Lanka’s policymakers have not learnt their lesson – that price controls have never worked and will never work. Following the implementation of price controls on tea, tea shops will stop serving sugar and ask people to buy their sugar separately. 

If you recall, in the recent past there was a Government-controlled price for chicken. Meat shops at one point stopped selling whole chicken and instead only sold chicken parts. Thereafter, we had many price controls on rice, dhal, tinned fish, sugar, cement, and even on USD. Anyone who has a reasonable memory will remember that none of these price controls worked. 

At one point, there were price controls on pharmaceutical products despite the currency depreciating by 80%. How can a company import the same drugs and keep the same price, with the cost rising by 80% due to poor monetary policy? The only option available for pharma companies was to stop procuring those formulas. 

The same happened with milk powder. The consumer became the ultimate loser by suffering shortages in the market. There is a sentiment that private businesses hoard similar goods, which are stocked at lower prices, and sell only when the prices are increased. There may be some truth in it. As we all are aware, the private sector is also a reflection of our Government sector and policymakers, and the private sector has been given those opportunities when competition is not allowed and financial instability is not managed. But ultimately the common person loses on both ends – both through shortages and higher prices. 

The price control on eggs is going to impact the less-fortunate the most, since eggs are their main source of protein. They don’t require refrigeration and they are more affordable compared to the other protein options. The price of 500 g of fish is now Rs. 1,500-1,800. Chicken and other protein sources are also very expensive. Even dried fish and sprats are more expensive than eggs when calculated on a per meal basis and when accounting for overall convenience, effort, LP gas consumption, etc. 

So when price controls discourage suppliers from supplying eggs at that rate in an environment where chicken feed prices have gone up and prices of medicine for poultry and transportation have increased, price controls simply become meaningless and send a completely wrong signal to markets, while we are in the spotlight for an IMF programme and debt restructuring. 

Import controls a mistake

The Government made a similar, crucial mistake by announcing import controls on 300 selected HS codes as a measure to save our valuable dollars. We need to first remember that we have already cut down quite a lot of imports and we are really scraping the bottom of the barrel by restricting our fuel and some essential medicines. We have completely banned imports such as vehicles for more than two years now. 

Sri Lanka’s imports have been declining since the 1990s; policymakers should ask themselves: if import controls brought us to our darkest hour, how are the same import controls expected to save us from the crisis? Some import bans are on intermediary goods, and, as economic theory has shown around the world, with import restrictions, exports will also decline and Sri Lanka will become a net loser. We have to discourage imports through the pricing of dollars so imports will automatically come down with higher prices.

Import controls will also confuse markets and dilute the credibility of the Central Bank Governor. As he mentioned, we have adequate forex for essentials in the coming months. So the question arises: if we have enough forex, what is the purpose of import controls?

Secondly, both import controls and price controls, in my view, will have an impact on IMF negotiations at home. The Article IV IMF staff report clearly notes that we have to phase out import controls. Announcing import controls at a time when they are visiting Sri Lanka sends a negative signal to the IMF and to our creditors that Sri Lanka is not open to reforms.

Trade is a two-way street

Already the European Union and Japan have on multiple occasions indicated the importance of trade. In fact, the European Union stated: “Trade is a two-way street.” In this context, we are creating more resistance from our neighbouring countries at the brink of a very important debt restructuring and IMF programme. 

Both recent policy actions indicate to the world that we are just following the same old methods and are not open to serious market reforms. We will also not comply with some guidelines of the World Trade Organization with this decision, isolating ourselves globally at a time we need support the most.

The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.

Debunking myths about reforms

Originally appeared on The Morning.

By Dhananath Fernando

As this column has highlighted many times, Sri Lanka is presently at a crossroads. Either we will excel and emerge as one of the dynamic tiger economies of Asia, or we will become a failed state, going from one crisis to another. There is simply no middle path between the two outcomes. 

So far in our history, we have missed the bus of economic reforms repeatedly. Our reforms of the late 1970s were half-hearted and necessary labour market reforms; other economic reforms haven’t been completed. Following this, we had a 30-year war and a short period of high growth post war. 

Recently, Prof. Premachandra Athukorala devised an interesting metaphor about Sri Lanka’s economy at Advocata’s #ReformNow conference on ‘Let’s Reset Sri Lanka’. He compared a sumo wrestler to a normal wrestler. 

Sumo wrestlers are big and heavy, whereas the normal wrestler is skinny and small-made in comparison. To the casual observer, it may look like the sumo wrestler is stronger than the normal wrestler, but in reality, the life expectancy of a sumo wrestler is about 20 years less than an average Japanese man. 

Prof. Athukorala compared the Sri Lankan economy’s high growth years to a sumo wrestler. Although the growth numbers were high, our economy has always been vulnerable – just one trigger can cause so many problems. 

As he very correctly mentioned, due to a few triggers such as the Easter attacks and Covid, we are going through a lot and will have to shoulder a great burden in the future. What we need to be, with regard to our economy, is a normal wrestler; one who is flexible, agile, and dynamic, with a high life expectancy and who can adjust easily to global trends and to challenging times. 

As we all know, change is difficult and resistance to reforms is inevitable. In many cases, it is untrue myths about reforms that drive this resistance.

Myth 1 – Privatisation would mean selling the family silver and our sovereignty 

A common myth against State-Owned Enterprise (SOE) reform is the rhetoric that it amounts to selling the family silver or selling off national assets. This is a popular argument in the vernacular.

We have to first identify most of our SOEs as loss-making; they are more of a liability than an asset. Secondly, being owned by the State doesn’t mean that they are owned by the people. If they are owned by the private sector, that is what you might call being owned by the people. 

Let’s take the Ceylon Petroleum Corporation (CPC) or SriLankan Airlines as examples. Both are owned by the Government of Sri Lanka. So where are the benefits for the people? There are none.

We can’t pump all the fuel we want despite being able to pay for it. Most of us can’t apply for a job at the CPC or at SriLankan, since many of these opportunities are given to supporters of political elites. As both institutes are loss-making and taxpayers are paying for something they don’t consume, what is left for the people to own or obtain benefits from? 

But if the same institutes were owned by the private sector, then that company would have to pay taxes, which is a source of revenue for the Government that can be spent on the people and on public goods. People can buy shares, will be entitled to a dividend, and can apply for job opportunities on a competitive basis. 

Sri Lankan businesses and foreigners can invest money and create jobs for our people while improving productivity and efficiency. So in reality, ownership of assets by private companies is a situation where they are in reality owned by the public. 

Consider the main telecom companies and conglomerates as an example. They are the main tax payers to the Government and are often victimised by one-off surcharge taxes when Government revenue drops significantly. This definitely does not mean that all participants in the private sector are clean, but we all know that they are usually better than the Government sector and Government-owned businesses. 

On the argument of sovereignty, it has been said that “the business of business is business”. Businesses enter a market to make profits and they become sustainable when they generate profit. Many Sri Lankans have successfully expanded globally, but have we ever heard the people of those countries complain that Sri Lankans have come to take the sovereignty of their country? 

Myth 2 – The IMF is the solution to all problems

Another common myth is that the International Monetary Fund (IMF) is the solution to all our economic problems. This is simply not the case. The IMF can only give us some money and credibility. Both will bring some stability, but our economy needs to grow organically and continuously like an agile, flexible wrestler for us to overcome the crisis and to become a tiger economy. 

The IMF cannot implement reforms for us – we have to buckle down and implement economic reforms and reset Sri Lanka for our own progress. The IMF is just a stepping stone on a long journey; it cannot solve all our problems. 

We have to welcome a full package of reforms to grow the economy. We have gone to the IMF about 16 times previously and only six programmes have been completed. Out of the Extended Fund Facility (EFF) programmes, which require structural reforms, we have completed only two programmes. Our track record indicates that we are a nation that expects the IMF to solve our problems rather than solving them on our own.   

Myth 3 – IMF is the problem 

On the flip side of the coin are those who think the IMF is the problem. They are of the view that the IMF is some sort of secret agent who will engineer all privatisations in the interest of Western oligarchs and they believe that the IMF operates like a gangster with a gun ready to shoot us if we don’t do what they say. 

This is simply untrue; the IMF in this case is the International Monetary Fund and not the Impossible Missions Force from Tom Cruise’s action film franchise. 

The IMF is like a bank’s credit officer who will evaluate a business proposal and then approve the granting of money. We all know bank officers don’t initiate business proposals, but the customers do. 

Similarly, the Government has to go to the IMF with a plan and the IMF will evaluate whether the plan is adequate to achieve the desired results. If we fail to adhere to what we promise, as we have done 10 times out of 16 in the past, they won’t release the balance money, and nothing will happen except the continued deterioration of our economy. 

Given this context, a side effect will be that no one else will come forward to give us assistance if we don’t move forward with the IMF programme. They are like a gym instructor and they can recommend a good diet and exercise, while our policymakers have to do the work to ensure an outcome. 

Myth 4 – Imports are the problem; imports are bad, exports are good

Since we have a USD/forex shortage, some are of the view that imports are the reason for the crisis. We first need to understand that before we import goods or services, we buy USD by paying in LKR for imports. 

If we really wish to do so, the best way to discourage imports is to increase the price of USD before we ban any imports. This is where the stability of the monetary system becomes of paramount importance in overcoming the crisis. 

If we need to encourage exports, the best way to do it is to pay the market rate for USD to exporters so they can be more competitive. This is why it is said that “stability is not everything and without stability everything is nothing”. 

The truth is that imports and exports are both good because they are two sides of the same coin. We need exports for imports and imports for exports. We need to look at overall trade reforms and facilitate further trade rather than thinking that imports are the problem. The problem is the monetary system which determines the price of USD, not imports or exports. 

The above are just four myths out of many. Those perceptions are like a virus, but we need to implement reforms and reset Sri Lanka if we are interested in forming a dynamic and healthy economy like a natural wrestler who can absorb shocks and perform in good times as well as in bad times.

The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.

The case for privatisation

Originally appeared on The Morning.

By Dhananath Fernando

Privatisation has entered the lingo of the nation once more. A few years ago, the mere mention of it was taboo in many circles and although the fear of using the word hasn’t fully evaporated, an increasing number of people actually understand the concept today. 

The discussion is now drifting towards whether privatisation is good or bad, with those proposing privatisation highlighting examples of success stories while those against it bring up examples of where it has gone wrong. 

In my view, rather than debating the merits of privatisation right away, the starting point of the discussion has to be about what Sri Lanka can do to overcome the crisis and how to transform our little island into a dynamic economy in Asia. 

On our journey to find answers, we can consider many options, of which privatisation is definitely one. However, our starting point has to be getting Sri Lanka out of this mess and our solutions have to be pragmatic and suited to our context. 

It is the same as a doctor prescribing medicine for ailing patients. The doctor first performs a diagnosis and then recommends medication based on the patient’s condition, history, affordability, side effects, and many more; he does not begin debating the merits of a particular treatment without a thorough diagnosis.

Obstacles against reforming the State sector

There is a brewing school of thought in Sri Lanka that given the many public corporations well-operated by honest and honourable professionals in other countries, nothing stands in the way of Sri Lanka having the same. The oft-cited examples include Singapore and New Zealand. 

Firstly, we have to realise that Sri Lanka’s context is very different. We are a country whose political system is rotten to the core. In fact, when President Gotabaya Rajapaksa took over the office of the president, he appointed a committee to appoint directors to State corporations and we are all aware how that ended. 

Simply put, our political system and context doesn’t facilitate getting talented professionals for the management of State-Owned Enterprises (SOEs). 

Secondly, the vast majority of capable professionals in Sri Lanka are very well compensated and taken care of by the private sector, so they have no reason to move to the public sector, which would come with a massive risk of political backlash and less pay to boot. Salary scales in our SOEs simply do not attract the right talent to drive management change. And that’s just one side of the story. 

Thirdly, Sri Lanka is now unfortunately bankrupt and most of the key SOEs carry both massive debts and losses. We cannot realistically expect the right talent to join and transform SOEs, knowing they will be faced with a difficult restructuring and turnaround, particularly without even the incentive of competitive salaries. 

Last but not least, there is a principal-agent problem when the State attempts to conduct business. The State is currently involved in many industries as botha  regulator and a market player. Can you imagine if the umpire in a game of cricket was also a batsman for one of the sides? 

The State is involved in a multitude of sectors including hospitality, aviation, modern trade, banking, energy and many more. Although it has a bigger role in establishing the rule of law and a competitive marketplace, it is instead wasting resources on micromanaging certain industries. 

The State is presently a jack of all trades and master of none, falling far behind expectations both in terms of ensuring the rule of law and managing business. 

Privatisation as a viable option 

It is in this context that Sri Lanka has to consider privatisation – not simply for the sake of privatisation but as a solution for the problems we have. There are six basic reforms that we have to implement if we wish to emerge from this crisis in a timely fashion.

• Increase revenue

Privatisation can increase revenue because private companies pay taxes to the State. At present, rather than receiving taxes, the Government finances a number of heavily loss-making institutions. When undergoing privatisation, the government earns money from the assets it sells, so on both ends it will bring revenue for the Government to overcome the crisis.

• Reduce expenditure

Currently, the Government’s main expenditure is on SOEs. The Ceylon Petroleum Corporation (CPC), for example, has lost Rs. 600 billion in four months. SriLankan Airlines has lost Rs. 200 billion in four months, an amount that is four times the entire Samurdhi budget (Rs. 50 billion), which is used to take care of the most vulnerable people in our society. 

When we privatise, our expenditure will fall and we will stop leaking money, whereupon those savings can be given to the most vulnerable.

• Reduce debt

SOEs not only increase expenditure and burden State coffers – they carry a lot of debt in both LKR and USD. The Central Bank Governor recently stated that the CPC had neither USD nor LKR to run its operations and that the Government had to finance it. Privatisation will reduce our current and future debt burden, which will help restructure our debt and achieve debt sustainability. 

• Increasing growth

Another important aspect of overcoming the crisis is to create growth. The current set-up of retaining State ownership of these loss-making and inefficient enterprises will simply slow down growth. 

Consider the example of the East Container Terminal. Multiple tender proceedings were stopped and cancelled but the Government was still said to be capable of seeing it through. However, it is now obvious that this is not possible given the crisis. 

Moreover, not only are we behind, but we are also losing container transhipment due to capacity constraints while business is moving away from the country, challenging our long-standing transhipment status. 

However, the private sector can drive growth. They have cash, and to an extent, lending capacity. The private sector is more concerned about profits, not so much about the overall economy of the country.  

• Increasing productivity

We all are aware of the productivity figures of State-managed institutes. News reports revealed that even with fuel shortages, the CPC had paid a total overtime pay amounting to billions of rupees. 

The private sector can drive productivity. It can introduce technology, processors, business ecosystems and networks to create synergies, which will create job opportunities and drive productivity across the nation. 

• Attracting FDI

The private sector, locally and internationally, can bring investments to our shores with privatisation (meaning US Dollars) in addition to technology and skills which will spill over to other sectors, driving productivity and efficiency. Foreign Direct Investments (FDIs) will undoubtedly ease the pressure off the Government in relation to USD shortages. 

Case-by-case basis 

Thus, privatisation suits Sri Lanka based on the crisis and context. It is a solution for what we are going through and a medication that fits the condition of the patient. 

However, this doesn’t mean we have to privatise everything. Energy and electricity have to be unbundled first and the market must be made competitive. The pressure on the Ceylon Electricity Board (CEB) and the CPC will ease and consumers will have a better experience. 

Some institutions such as SriLankan Airlines have to go for a fire sale, while some institutions can be consolidated and some can opt for public-private partnerships. There is no single remedy for all, but we have to move forward on a case-by-case basis. The important thing is to move forward and for the State to slowly move away from doing business, instead focusing on the Judiciary and the rule of law. 

The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.

Can the ECT buoy the Colombo Port?

In this weekly column on The Sunday Morning Business titled “The Coordination Problem”, the scholars and fellows associated with Advocata attempt to explore issues around economics, public policy, the institutions that govern them and their impact on our lives and society.

Originally appeared on The Morning

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Sri Lanka’s location at the midpoint of international trade routes, positioned at the centre of the Indian Ocean, is a fact that we probably know by heart. But what’s important is the question whether we are exploiting this position. Our ports and good policy decisions are the tools that allow us to change geography into tangible benefits. The performance of the Colombo Port has been exemplary. It recently handled its seven millionth container and was ranked the fastest-growing port in 2018. However, with the Colombo Port operating at approximately an 80% capacity, this growth and the benefits it brings have an expiration date.

What is the ideal role of the government in the shipping industry?
The government should most definitely not be both a player and a regulator. Right now, the Government plays both roles, and the potential for a conflict of interest is enormous. It also means that it is increasingly difficult for competitive neutrality to be maintained. However, the government should not be completely removed from the industry. The role of the government lies solely in being a landlord and regulator, for if the Colombo Port is to grow while remaining efficient and profitable, regulation is required to address anti-competitive practices, monitor performance, and enforce standards. Of course, when advocating for government regulation, one wants to steer clear of the miles of red tape that the government is fond of. A caveat of this argument is that a balance be struck, so that regulation does not stifle innovation or investment.

What makes economic sense?
Establishing the hard and soft infrastructure a port requires is a capital and time-intensive task. There also needs to be strong commitment, which the Government lacks. Colombo International Container Terminal (CICT), which is a joint venture between China Merchants Port Holdings Company Ltd. and the Sri Lanka Ports Authority (SLPA), signed a BOT agreement in 2011. The terminal was operational by 2013. In comparison, the construction of the breakwater for the Jaya Container Terminal (JCT) run by the SLPA took four years, from 2008 to 2012. CICT developed an entire terminal in less time than it took the SLPA to construct the breakwater for its existing terminal.

Lack of direction and consensus from decision makers in government have resulted in the East Container Terminal (ECT) – a strategically important terminal remaining unused and idle. It is clear that the Government needs to step aside and allow the private sector to come in. This is evidenced by the performance of the South Asia Gateway Terminal (SAGT), which is operated on a BOT basis with the Government of Sri Lanka and a consortium of local and international establishments, which was awarded the “Best Terminal in the Indian Subcontinent Region” for the third consecutive year in 2019 and won the “Best Transhipment Hub Port Terminal of the year” at the Global Ports Forum.

Percentage change in TEU handling from 2016 to 2017 (Source: Ministry of Ports and Shipping, Performance Report (2017), compiled by the Advocata Institute)

When comparing the success of the different terminals, the same conclusion can be drawn. Looking at the comparison of the number of Twenty-foot Equivalent Units (TEUs) handled by the terminals from 2016 to 2017, the CICT is the best performer. Interestingly, while both SAGT and CICT have enjoyed an increase of 10.9% and 19.3% in TEU for 2017, JCT has witnessed a 4.3% drop. The privately-operated terminals outperforming the SLPA Jaya Terminal speaks volumes.

“Seaports are interfaces between several modes of transport, and thus they are centers for combined transport … they are multi-functional markets and industrial areas where goods are not only in transit, but they are also sorted, manufactured and distributed. As a matter of fact, seaports are multi-dimensional systems, which must be integrated within logistic chains to fulfill properly their functions.”

— United Nations Conference on Trade and Development

Ripple effects of private ownership

This definition by the United Nations Conference on Trade and Development succinctly describes the importance of ports and port infrastructure, and accurately shows how ports cannot work in silos. They are an integral component in a wider network of business, infrastructure, supply chains and employment. If we want profitable and efficient ports, we need similarly performing ancillary services.

Ancillary services and ports enjoy a symbiotic relationship. On one hand, ancillary services are series of economic activities which provide services and create employment; which are dependent on the port. On the other hand, the port benefits from efficient ancillary services as they make the port and its terminals more attractive to clients and boosts its own performance.

Ancillary services include logistics, bunkering, marine lubricants, freshwater supply, off shore supplies and ship chandelling, warehousing and many more. These services, and their ability to grow is affected by the general functioning of the port, and therefore is affected by the ownership of the terminals.

For a port to survive, ancillary services need to constantly innovate and remain productive. There is no need for this article to expound on how the government is not the place to go to when in search of innovation. This is clearly the forte of the private sector. This is backed up by the fact that so far, private ownership of terminals and profitability go hand in hand. In short, if profitable and productive terminal creates a well-functioning port, allowing ancillary services to grow; then we should be looking to the private sector for investment and not the government.

What is happening with the ECT?

As mentioned above, the Colombo Port is fast growing. However, if you were to look at the Colombo Port from one of the many high rises in the Fort area, spotting the East Container Terminal would not be difficult – it’s the only terminal with nothing happening. No cranes, no ships, no activity.

The East Container Terminal is not significant simply for its disuse. Compared to the West Terminal, it is situated in the middle of the new port and the old port of Colombo. This gives it an advantage as it is closer to all other terminals and moves inter-terminal cargo a smaller distance. This gives it an important edge as inter-terminal cargo is an important component of transshipment. The depth of the ECT, at 18m allows it to handle container shipments, adding to its value. In short, the ECT has a clear operational advantage.

It is evident that the country has lost out in this scenario. In a port that is as fast growing as the Colombo port, the decision makers of this country have, for a variety of reasons, not developed the ECT. The Sri Lankan government has taken many stances over the years. It both invited expressions of interest and business proposals for the development of the ECT and cancelled tenders, insistent that the ECT will be run by the Sri Lanka Ports Authority – sending mixed signals to interested parties, and effectively ensuring that investors are reticent, and development of the port has stalled.

Politics have dictated the government’s decisions on the ECT, and the result is that the country has lost out. In shipping the government has an important role to play in regulation and ensuring standards are adhered to, but it cannot be both a player and a regulator. The performance of the JCT in comparison to the private terminals makes it clear that government is not as effective as the private sector, it should limit itself to the task of regulation. In conclusion, the ECT should be opened for private ownership as soon as possible, following the precedent set by the BOT models of the CICT and SAGT.

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Aneetha Warusavitarana is a Research Analyst at the Advocata Institute. Advocata is an independent policy think tank based in Colombo, Sri Lanka. They conduct research, provide commentary, and hold events to promote sound policy ideas compatible with a free society in Sri Lanka. She can be contacted at aneetha@advocata.org or @AneethaW on twitter .

SriLankan Airlines and the Case for Privatisation

Originally appeared on Sunday Times

By Aneetha Warusavitarana

The government’s policy document ‘Vision 2025: A Country Enriched’ positions Sri Lanka as a knowledge based, highly competitive, social market economy; and much of the content of the document is in line with increasing competition, productivity and efficiency.

The state of SriLankan Airlines, however, is in the antithesis of efficiency and productivity. The airline has been raking in losses for years now, and on Monday the 7th of January, the president appointed a committee to once again work on its restructuring. The new committee will assess the previous reports and restructuring plans and have now completed their recommendations.

It is evident that state ownership of this airline is not working, so what are the solutions?

Back when SriLankan Airlines was still Air Lanka, it was privatised. The government sold a 40% shareholding to Emirates Airlines in 1998, and contracted Emirates to manage the company for ten years with the government of Sri Lanka retaining majority shareholding. In 2008, the government took back complete ownership of the airline, and from then on, the losses began [1].

Source: Sri Lankan Treasury Annual Report (2008, 2018)

Privatisation has worked in the past, and the argument for privatisation of a state-owned airline is strong. To begin with, the aviation industry is an investment heavy industry, which requires expertise and foresight. Beyond procuring airplanes and terminal space, there is a web of domestic and international regulations to navigate, not to mention standards to adhere to. From then on, once you have the planes and are ready to start, the airline needs to be competitive in order to survive. It requires strong management and effective marketing, with a team that can adapt to external shocks in fuel prices, domestic and international politics, and changes in foreign exchange rates. Even if it has the money, a government is ill-equipped for this task, evidenced by the track record of the airline in state hands. During the period of 2009-2017, when the airline was under state management, it has accumulated losses of Rs. 148,707 Mn [2]. Repeated promises of restructuring or turnaround have remained unfulfilled.

While privatisation of SOEs, and specifically the privatisation of state-owned airlines is theoretically sound, appropriate implementation is necessary. The Organization for Economic Co-operation and Development (OECD) has done extensive research on privatisation of state-owned enterprises and has identified some key features that successful privatisations have had in common. Detailed below are some features that are relevant to Sri Lanka [3].

• Strong political commitment to privatisation at the highest level in order to overcome bureaucratic inertia and to resolve inter-institution rivalries in order to move the process forward.

• Clearly identified and prioritised objectives in order to provide the policy with focus and a sense of trade-offs that may be required.

• A transparent process to enhance the integrity of the privatisation process, gain credibility with potential investors and political support from the public.

• An effective communication campaign to explain the policy objectives of privatisation and the means by which they are to be achieved in order to respond to public concerns and to gain support for the policy.

• Allocation of adequate resources in order to meet the demands of the shift to privatization.

Partial privatisation of SriLankan as a more viable solution?

Privatisation does not always have to be full divestiture of the asset; the option of partial privatisation is open. In this scenario, governments sell a minority stake and retain a degree of control, while the enterprise reaps the benefits that accompany privatisation. The process of privatisation will bring with it a much needed infusion of private equity, new management, clearly defined guidelines and a more flexible financial structure. The focus of the airline will shift towards increasing profitability and efficiency, with the aim of increasing shareholder value. Given Sri Lanka’s past success story with the partial privatisation of Air Lanka, it is possible that this solution will be pursued or at least considered.

The pitfall of partial privatisation

Drawing from the experience of privatisation in other countries when governments remain the majority shareholder, the space for political interference continues to exist [4]. This is the biggest potential pitfall, and the SriLankan experience can attest to the damage this can cause. As of now the government is struggling to create interest in the purchase of the airlines, and the fear that the government will once again step in and interfere with the management is the most probable reason behind this.

If the government is considering partial privatisation, steps should be taken to ensure that the government’s interests remain those of a shareholder and not those of a political entity. Given past track records, assurances of non-interference are unlikely to inspire confidence.

In 2015 the Hon. Prime Minister, Ranil Wickremesinghe mentioned that the government was considering the Singaporean Temasek model of a holding company as a solution to the problems of SOEs in Sri Lanka [5]. Establishing a holding company for SOEs would help bolster investor confidence and improve the functioning of the airline. It would professionalize the management and create distance from local politics [6]. It is a shame that even though this idea was brought out in 2015, it was never implemented. The question that remains is whether the government will take this into consideration and take decisive action on this problem four years later.

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[1] Ratnasabapathy, R. (2016). The renationalisation of SriLankan airlines and the follies of state enterprise. In: The State of State Enterprises in Sri Lanka. Colombo: The Advocata Institute.

[2] Ten Year Review: SriLankan Airlines Annual Report 2016/17. Colombo.

[3] Privatising State-Owned Enterprises: An Overview of Policies and Practices in OECD Countries. (2003). Paris: OECD Publishing.

[4] Ibid

[5] Wettasinghe, C. (2015). Temasek model to make public enterprises viable. Daily Mirror. (Online - Accessed 16 Jan. 2019)

[6] Kim, K. (2018). Matchmaking: Establishment of state-owned holding companies in Indonesia. Asia & the Pacific Policy Studies, 5(2), pp.313-330.