Walking the talk on reforms: First step to Lankan recovery

Originally appeared on The Morning.

By Dhananath Fernando

Often we all see the world the way we want to see it, and not as it is. Sri Lanka’s economic crisis is also seen by many people through their own perception of reality. 

In previous years, we believed that self-sufficiency, State-led industrialisation, State-centred economic planning, and more recently, Modern Monetary Theory, were the way forward for our economy. The current crisis has shown that none of that has really helped us; by contrast, it has exacerbated a poor situation to where we are today.  

Next comes the question of overcoming the crisis. This has to be analysed with context; the most significant piece of context is that we are facing the worst situation we’ve been in since independence in 1948 – and it is only getting worse. 

There are some suggestions to increase industrialisation, improve exports and the trade balance, and incentivise Foriegn Direct Investments (FDIs). However, it is of no use to have lofty goals of industrialisation when we can hardly provide an uninterrupted electricity supply. 

Foreign investors are planning to leave. Investors are by no means considering entering the country. Thus, potential solutions have to be evaluated based on this context. Simply having a wishlist of suggestions with minimal viability will add very little value at this juncture. We need rational solutions to solve the crisis immediately, rather than policies that can only be enacted in times of relative normalcy. 

The Government needs to bring its finances into a sustainable state. Revenue must increase and expenditure should be reduced. Reducing the losses of State enterprises is a way to reduce the deficit without touching social expenditure.

With that in mind, here are a few suggestions for reform:

1. Privatise SriLankan Airlines

At a time when people are struggling to feed their families and when our official usable reserves are less than $ 200 million, there are very few upsides to running a fully State-owned airline making losses equivalent to the value of our entire Samurdhi scheme, which, despite its flaws, is the main social safety net in Sri Lanka. Privatisation will provide strong signals that we are serious about reforms. 

For the last 15 years, we have not made any profits on SriLankan Airlines. We can disclose all finances and ask for interested companies to buy it outright with assets and liabilities. Having a higher liability than assets is the main problem in this instance. With the suspension of debt repayment of State enterprises, Treasury guarantees for the State are on hold at the moment. 

Even if we need to pay a certain amount to the buyer to take it off our hands and sell it off with staff, it is much better than keeping the enterprise in-house and incurring colossal losses repeatedly. The new buyer can be given the responsibility of staff restructuring. We can follow the playbook through which Air India was sold outright by the Modi Government. Our airline is unfortunately no longer an asset but a liability to our national coffers. 

However, it is not only the National Airline that makes losses. There are many institutes that add little value to the public, make massive losses, and are a very high burden on the Treasury. Some of these public enterprises are classified as ‘strategic’ and others as ‘non-strategic,’ but two things they have in common is that, more often than not, they make substantial losses and have very limited transparency. 

There were some discussions to revive Sri Lankan Airlines by appointing business leaders with a profit motive, converting it to a budget airline, and appointing committees to reform and restructure. We have run out of time to even attempt these options. Unfortunately, hard times require hard decisions and we do not have the time, money, or options to avoid them. 

With interest rates and Treasury bill interest rates reaching above 20%, running loss-making enterprises on borrowed money will make our local debt increasingly unstable the more we delay reforms. Most importantly, we don’t need to wait for pressure from creditors or the International Monetary Fund (IMF) to kickstart reforms; we can begin them now.

2. Better utilisation of idle assets

Improving service efficiency and increasing revenue of railways through Public-Private Partnerships (PPP) have to be the way forward for better utilisation of idle assets. 

Sri Lanka Railways is categorised as a department of the Government, even though it is actually a State-Owned Enterprise. Sri Lanka Railways holds a considerable amount of State land which is used very unproductively. 

Fort Railway Station, Maradana Railway Station, and the surrounding land along the track between these two stations are prime examples. Major railway stations such as Kollupitiya, Wellawatte, and Bambalapitiya are all prime beachfront properties which are very poorly maintained and completely underutilised. Land prices in Colombo are extremely high. There are plenty of such examples under the Railways Department with zero or negative value addition to our economy. Sri Lanka Railways first has to be made a State-Owned Enterprise, and then the sector needs to be opened for private sector investment. 

In the past, some train compartments were operated by private players and it was a very successful and lucrative business model. If we eliminate the State railway monopoly and open up the time table, tracks, and properties to the private sector, we can cut down on our fuel consumption significantly, provide a convenient service to passengers, and even turn a loss-making liability into a revenue-generating asset.

Given the very high energy prices at present – which are only set to increase – many people need the option of efficient and robust public transit infrastructure. In any case, the majority of people in Sri Lanka cannot afford to purchase and operate personal vehicles, and trains have been the main source of transportation in areas where they are available.

It is also of paramount importance that the most vulnerable segments of the population benefit from a rehauled cash transfer system, which should cover the energy price component in public transport. Everyone, regardless of their socio-economic stratification, should be given a fair chance to compete in life. 

However, it should be emphasised that these two steps alone will not help overcome the crisis. However, it is a good start to get the wheels rolling on reforms. These reforms will provide an unambiguous signal to investors and the world that we are no longer a NATO (No Action, Talk Only) nation, but a nation that walks the talk.

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.

Sri Lanka Railway railed with strikes and losses; Time to reform?

Originally appeared on The Morning.

By Anuka Ratnayake and Aaditha Edirisinghe

On 13 January 2022, the Station Masters’ Union launched a 24-hour token strike cancelling over 200 scheduled trips. As a result, commuters heading back home from Colombo, long distance travellers, tourists (both local and foreign) were all inconvenienced and left stranded in stations partway through their journey. Angry commuters attacked the train bound to Batticaloa when it passed the Kekirawa Station. This public outrage at the services provided by Sri Lanka Railway (SLR) is nothing new. However, little has been done to reform or restructure amidst public disappointment and escalating losses.

Why should the Railway be reformed? 

Operating as a Government institution under the Ministry of Transport, SLR is the country’s primary alternative mode of public transport to the often congested road network. Underpricing of railway fares along with systemic issues including mismanagement and poor governance have led to recurring annual losses. Despite budgetary support, the railway has recorded an accumulated loss of Rs. 46.7 billion in the years 2015-20. 

As with many transportation networks globally, the impact of Covid-19 has made SLR’s financial position increasingly precarious; with revenues down, losses amounted to over Rs.10 billion in 2020 alone. The widening chasm between the revenue raised and expenditure incurred, stood at a staggering Rs. 22 billion in 2018, as per official records. This has led to the dependence on Government bailouts. The Treasury spent a grand total of Rs. 48.7 billion in 2020, of which around Rs. 14 billion was for recurrent expenditure such as salaries, subsidies and grants. 

Sri Lanka Railway has an exceedingly large workforce with very active trade unions and an extensive bureaucracy. According to the official statistics of 2019, SLR has 14,207 employees. The total personal emoluments incurred for the same year was Rs. 9.8 billion, which was up by Rs. 809 million compared to 2018.

Due to the overstaffing issue, work duplication is often seen at SLR and is a serious issue affecting efficiency. Union actions are a burden on the operations of SLR, as observed during the last week of December 2021 and on 13 January 2022. 

In an interview conducted in January 2022, the Station Masters’ Association Chairman Sumedha Someratne claimed that as a result of the strikes in December, SLR incurred a loss as high as Rs. 20 million per day although the Railway General Manager quoted a much lower figure. 

A major reason for SLR’s budgetary reliance is the lack of cost reflective pricing. As of now, for a trip between 51-100 km, the fare per kilometre is around Rs. 3.30 for first class seats and Rs. 1 for third class seats. This underpricing has led to a reduction in the availability of funds to cover operational costs, resulting in the lack of finance for maintenance and repairs; by 2017, 65% of SLR’s locomotives were over 30 years old. 

The Urban Transport Master Plan 2014 identified several irregularities of the condition of the railway. A few noteworthy issues were the malfunctionings in the signalling system along with the deformation of rails and irregularities in alignment, which caused delays and sudden cancellation of trains. This poses a threat to passenger safety and is increasingly dangerous during inclement weather conditions. 

Reform recommendations 

Given that Sri Lanka is facing an economic crisis, the treasury cannot afford to shield SLR from the adverse repercussions of its inefficient operations. Immediate reforms are needed to get SLR back on track. 

Since most of SLR’s issues stem from its inability to raise sufficient revenues, the implementation of a cost-reflective fare structure should be prioritised. However, standing in the way of such price reform are the cheap fares of public bus service, the primary substitute to rail transport.

Therefore, for the price revision to be viable SLR should look into improving the quality of service to justify higher prices while reducing costs to be more competitive. 

Furthermore, to offset some costs SLR can focus on the profitable use of its vast asset base, such as its 13,000 acres of land which can be capitalised for this purpose. In 2017, it was reported that nearly 15% of land owned by SLR was leased to 6,400 users. Yet it has been unable to collect Rs. 1.46 billion in lease revenue from the users of the land owned by the department. Better management of real estate would bring in massive revenues to the Railway Department, which can be used to finance repairs and maintenance. 

Moreover, the Railway Department can focus on improving freight transportation, a lucrative and profitable source of revenue generation. According to the Asian Development Bank, by 2017, the freight transportation service market share of Sri Lanka Railway had eroded to less than 1%. The lack of necessary transportation and containerisation equipment limits the freight business to goods such as cement and petroleum. In the interest of expanding the freight service with the available resources; tracks which are reserved for passenger transportation during the daytime can be utilised under a night schedule. 

Furthermore, portions of SLR’s underutilised land can be used profitably for freight-related logistics services which will also bring in much-needed revenue to the loss-making institution.  

To bridge the prevailing investment gap at SLR, public private partnerships (PPPs) should be encouraged for operations and maintenance. A major bottleneck in SLR’s ability to deliver a consistent service is the outdated and malfunctioning infrastructure it owns, such as signalling and tracks. Investments in this respect will allow SLR to provide the public a consistent service while accumulating a sustained influx of cash. 

Colossal losses of state-owned institutions such as the Sri Lanka Railway is a burden on the state coffers, and ultimately the taxpayer. The Government’s increasing reliance on debt to keep such institutions afloat is compromising the economic future of Sri Lanka. Thus it is the need of the hour to begin reforming and restructuring potential cash cows such as Sri Lanka Railway. If reformed, Sri Lanka Railway would undoubtedly be a pillar of Sri Lanka’s transport infrastructure, contributing to the overall productivity of the economy.

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.