State-owned enterprises: A major crisis in the making

Originally appeared on Daily FT, The Island, Ada Derana Biz, Ground Views and The Morning

By Migara Rodrigo

Sri Lankan State-Owned Enterprises: A Major Crisis in the Making

Sri Lanka has a whopping 527 state-owned enterprises (1) (SOEs). The 55 SOEs classified as “strategically important” alone employ 10% of the public sector workforce (2) or about 1.9% of all workers. Such a large number of SOEs are not the norm globally(3); many other countries (such as India) have been reducing their stakes in SOEs and, in some cases (e.g. Air India), have been privatizing them entirely. SOEs - particularly many in Sri Lanka - tend to be grossly inefficient, loss-making, and a burden on the taxpayer. The time is ripe for major SOE reforms. 

What is an SOE?

An SOE is traditionally defined as a commercial entity that has majority ownership/control by a nation’s government – in Sri Lanka, this can include statutory bodies, regulatory agencies, promotional institutions, educational institutions, public and limited companies. While Sri Lankan SOEs have traditionally been incorporated by an Act of Parliament, in recent years these entities have also been incorporated under the Companies Act instead. 

Sri Lankan SOEs can be divided into three categories: 55 Strategic SOEs, 287 SOEs with commercial interests, and 185 SOEs with non-commercial interests. Unlike nations such as India which mandate internal audits of their SOE’s business activities and publish an annual overview with a balance sheet of each individual business, the majority of Sri Lankan SOEs do not reveal this pertinent information to the public; financial information is available for just 10.4% of SOEs. 

Fundamental problems with Sri Lankan SOEs

Contrary to what some believe, low quality of talent is not the most significant issue with SOEs; many employees are eminently qualified and capable. Unfortunately, these organisations fall victim to government mismanagement and corruption. In addition to excessive employment to fulfil their political ambitions, there have been allegations that some SOEs have been formed purely to facilitate corruption – for example, the Lanka Coal Company engaged in fraudulent deals to purchase coal causing a loss of over Rs. 4 billion (allegedly with the knowledge of the minister in charge)(4). 

SOE financials are late and few obtain ‘clean’ audit reports. Investigations have revealed repeated instances of fraud, mismanagement, corruption and negligence. Furthermore, the internal control, monitoring and governance frameworks seem inadequate to deal with these problems – of over 500 SOEs, regular information is only available for 55. Even obtaining a complete list of entities proved to be a challenge. Public access to information is limited – the Department of Public Enterprises has not released an annual report since 2018, and right-to-information requests often go unanswered.

Figure 1 Source: Ginting, Edimon et al, 2020, Reforms, Opportunities, and Challenges for State-Owned Enterprises, Asian Development Bank

Moreover, SOEs have few budget constraints and shareholder (public) accountability and therefore have limited incentive to control costs. Unlike with private sector enterprises, which have a need to make a profit, many SOEs (particularly in Sri Lanka) can simply borrow from other state organisations/banks or the government when they require additional funds, which undermines the threat of bankruptcy as a source of discipline(5). Some recently established SOEs have found a new way of bypassing budgets and oversight: by incorporating as companies rather than through an act of Parliament, they are excluded from Parliamentary accountability and allowed to rack up unsustainable debts and surpass budgets more easily. This has led to SOEs burning through taxpayer rupees: the cumulative losses of the 55 strategic SOEs from 2006-20 amounts to Rs. 1.2 trillion.

Finally, while some SOEs do manage to make a profit this is, more often than not, due to the advantage that these companies have in an uneven playing field. In addition to lax budgetary requirements and the ability to rack up unsustainable debts, these companies are supported by the government through direct subsidies and state-backed guarantees; by regulators through exemptions from antitrust policies and preferential treatment; and by the justice system through an ability to sidestep parliament. This has led to private sector organisations being crowded out of the industries that SOEs operate in. Instead of having private firms in the marketplace with efficient and high-quality services, the Sri Lankan taxpayer is beset with SOEs with total liabilities of 4-5% of GDP(6).

Potential reforms 

Given that the nation has reached an economic tipping point, with serious questions about debt sustainability and government solvency, it is clear that immediate action must be taken. Advocata proposes a short-term policy solution consisting of privatisation, restructuring and disinvestment, and listing on the Colombo Stock Exchange. None of these solutions are particularly radical in the global or local context. According to Lankan Angel Network Director Anarkali Moonesinghe, the two main policies of both Western and Eastern governments when reforming SOEs are to reduce subsidies and increase efficiency, forcing SOEs to compete more equitably with private enterprises.

Alternatively, full or partial privatisation is a possible solution: SLT-Mobitel’s service has markedly improved following its 1997 privatisation and the entrance of competitors such as Dialog Axiata, all held accountable by the broadly competent Telecommunications Regulatory Commission. Listing on the CSE would allow these firms to have broad-based direct ownership, while also improving the growth of the CSE and capital markets. Importantly, these firms would have to be ‘corporatised’ before listing, an opportunity to improve productivity and eliminate bloat. 

There are, unfortunately, firms that will essentially have to be given away due to their huge debts and poor reputations. A prime example of this is SriLankan Airlines, which has racked up Rs. 316 billion in losses (7) since control was taken from Emirates in 2008. While some will regard this as a blow to our national pride, Sri Lanka would not be alone in taking such a pragmatic step to improve government finances and customer experience; Air India, the Indian national carrier, is currently in the process of being sold to the Tata Group for the relatively small sum of INR 18,000 crore. This would also inspire confidence in Sri Lanka amongst foreign investors as it would show the country’s commitment to meeting its upcoming debt servicing obligations.

Furthermore, long-term solutions include strengthening governance/limiting corruption and influence, improving efficiency, enacting cost-reflective pricing, and finally unbundling key sectors. This applies particularly to firms like the Ceylon Electricity Board which, as a natural monopoly, cannot be broken up and privatised without losing efficiency. A 2006 study by the Japan International Cooperation Agency recommended breaking up CEB into three parts: “making the generation, transmission, and distribution divisions…independent” (8). Despite the 15 years and multiple nationwide blackouts that have occurred since, GoSL continues to drag their feet on the issue, as it is politically unpopular. 

Cost-reflective pricing (also prevented due to political unpopularity) is another essential reform. The existing system of having electricity tariffs priced below cost is a public subsidy whose cost will be borne by future generations. It is also inequitable, as the Government could provide low-cost services to those who need it by giving them direct cash transfers, instead of subsidising the wealthy who can afford to pay. A similar situation is evident with the Ceylon Petroleum Corporation, which currently makes a loss of Rs. 23-38 per litre of fuel (9); again, a public subsidy to those who can often afford to pay the market price. Finally, greater accountability, by means of annual internal audits and the availability of SOEs’ financial information to the public, is also important to ensure these firms stick to the targets they are given.

A successful and thriving market, in most industries, will only occur with the presence of three crucial factors: competition, a good framework, and competent regulation. By reforming Sri Lanka’s SOEs to meet these criteria, we will ensure a good customer experience, a reduction in the government deficit, and general prosperity for all key stakeholders. 

References:

1 Ratnsabapathy, Ravi et al, 2019, The State of State Enterprises in Sri Lanka, Advocata Institute

2 Dissanayake, Imesha, 2021, SOE Reforms; the Impetus for Post Pandemic Economic Revival, Ceylon Chamber of Commerce

3 Büge, Max et al, State-owned enterprises in the global economy: Reason for concern? Last modified: May 2nd, 2013 

4 ColomboPage.com, President to take action against removal of head of Lanka Coal Company, Last modified: January 21st, 2017, http://www.colombopage.com/archive_17A/Jan21_1484983651CH.php

5 Ratnsabapathy, et al, The State of State Enterprises in Sri Lanka

6 WorldBank.org, South Asia Must Reform Debt-Accumulating State-Owned Banks and Enterprises to Avert Next Financial Crisis, Last modified: June 29th, 2021, https://www.worldbank.org/en/news/press-release/2021/06/24/south-asia-must-reform-debt-accumulating-state-owned-banks-and-enterprises

7 PublicFinance.lk, Sri Lankan Airlines: Annual and Accumulated Loss to the Public, Last modified: 24th August 2021, https://publicfinance.lk/en/topics/Sri-Lankan-Airlines:-Annual-and-Accumulated-Loss-to-the-Public-1629789830

8 Saito, Yoshitaka et al, 2006, Master Plan Study on the Development of Power Generation and Transmission System in Sri Lanka, Japan International Cooperation Agency Economic Development Department

9 EconomyNext.com, Sri Lanka’s CPC says petrol, diesel losses rise as LIOC hikes prices, Last modified: 25th October 2021, https://economynext.com/sri-lankas-cpc-says-petrol-diesel-losses-rise-as-lioc-hikes-prices-87276/#modal-one

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.

Public transport reform: Covid is our vehicle

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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By Dhananath Fernando

We’ve had enough discussions about how Covid-19 could bring about a new normal, and its negative impacts on the economy and our day-to-day lives. However, “crises” do not only bring threats but also open up ample opportunities. That’s probably why wartime UK Prime Minister Sir Winston Churchill said: “Never waste a good crisis.” Reforming our public transportation is one golden opportunity presented to us on a silver platter due to Covid-19. 

What’s wrong with our public transport?

When Sri Lanka progressed to a middle-income country to reach GDP per capita of $ 4,000, people could afford a personal vehicle even with the exorbitant import tariff imposed by the Government. As a result, about 48% of Sri Lankans started commuting to the city in their personal vehicles.

At the same time, our public transport, still lumbering along as it was in the mid-1980s, had not progressed to the aspirations and expectations of a fast-growing middle class. Adding to woes, the quality of public transport depleted at a rapid rate, increasing the number of people commuting in their personal vehicles and burning more fossil fuels, which account for 19% of our total imports. The environment paid the price as our air quality index plummeted. Simply, our problem was that we had been commuting vehicles instead of commuting people. 

Commuting amidst COVID

With Covid-19 hitting us hard, buses and trains cannot operate to their full capacity, according to the Government’s health guidelines. That brings two contradicting problems. People may not have adequate commuting options to adhere to health guidelines, so individuals commuting via crowded public transport pre-pandemic may consider travelling in their own vehicles for health reasons when the economy gradually opens up, spelling disaster and making our existing traffic jam worse.

At the same time, bus owners will be demotivated to field their buses as they cannot make a profit without operating at full capacity without a ticket price revision.

Meanwhile, some commuters may not need to travel at all while “working from home”.

Hidden problems and mediocre solutions

 Whenever the topic of public transportation enters the national discussion, our solutions have been very shallow and out of depth. We have taken a more regulatory and blanket tariff approach instead of understanding the real problems. The popular solutions were increasing tariffs on vehicle imports and discussing a ban on tuk tuks, claiming that they contribute to most of the congestion and accidents, even though hard facts paint a completely different picture.

Looking back 20 years, do you see a different brand or structure of buses running on our roads? It’s the same box-type Leyland or Tata, and the same air-conditioned (AC) Rosa buses. Why has the structure of the buses operating on our roads not changed over the last 20 years, when the world has moved to the extent of offering services of unparalleled comfort and safety?

With limited railway service, the 138 bus route (Maharagama/Homagama-Pettah) is considered the most congested bus route to the commercial capital of Colombo. Even at an electoral level, Maharagama/Homagama is considered one of the most densely populated suburbs where aspirational Sri Lankans live, or in other words, where the educated middle class reside.

Have you ever wondered why AC buses do not operate on this route? Most of the main routes (Galle Road, Kandy Road, Negombo Road, Battaramulla Road, Gampaha, etc.) on which most educated middle-class citizens commute to the city on a daily basis for employment, business, and education, use buses which are in the dilapidated state; the so-called luxury service (AC) is horrendous, despite passengers being charged double the usual price.

Have you ever thought about why, while there is a big demand for people to commute comfortably even at a higher price, no one ever thought to have more AC buses, at least as a surface-level solution? That is where a pragmatic approach to public policy, in this case, transport policy, comes into play.

Deadly combination

Ideology aside, the deadly combination for any market, which leads to its stagnation, is lack of competition, over-regulation, and price controls. Unfortunately, our public transport system has all three in just the right amounts to brew a recipe for disaster, costing the Sri Lankan economy a colossal amount of money and having a significant environmental impact.

The route permit for buses that commute between districts costs several times more than the bus itself. At the same time, the route permit is not competitively priced, creating entry barriers and restricting supply. Private bus owners request that even if new route permits are issued, the existing bus owners should be given priority. Simply put, the public bus owners run a cartel, creating meticulous entry barriers so they can continue to provide a ramshackle service to the public and get away with it. On the other hand, a maximum price ceiling on a ticket price is imposed by the Transport Authority. 

On the flip side, bus owners have no incentive to field a higher quality bus and a higher quality service as the ticket price would be the same, whether a new or old bus. In a similar way, buses can’t charge a premium for providing a friendly and courteous service. Irrespective of whether they operate during off-peak hours or peak hours, the price of a ticket is the same. Due to this, there’s no incentive for buses to operate after dark and the few that do run are often seen racing each other to grab passengers at the next halt, in contrast to the crawl during rush hour.

Think of a situation where airline ticket prices are regulated – undoubtedly, it looks silly, given the dynamism of the industry. The same applies to public transport. As a result, there is no competition in the public transport space. Trains are a government monopoly and there is no competition and no pressure for them to increase their services as they have no incentive, even if they improve the quality and quantity of service. Their incentive is securing overtime via inefficiencies; they earn the same salary regardless of service levels.

The taxi service which has evolved without single government regulation, respecting market forces, is the only hope for the people. As we all know, the night rates are higher in taxis. The taximeter works in a system where when demand in a specific area is high, prices are higher. As a result, resources are better managed and utilised. People can plan their lives methodically and decisions can be made rationally, while convenience is delivered to your fingertips. Of course, there are areas for improvement, but undoubtedly, service levels, experience, and value for money are far superior. 

Central Bank Annual Report 2019 Table 81

Opportunity post Covid-19

Subject experts such as Prof. Amal Kumarage of the University of Moratuwa have done enough research and listed solutions to bring an end to this debacle in many forums.

What the Government could do is reconsider the route permit system and do away with entry barriers for businesses to enter the public transport market which would then end the present cartel.

The Government has to reconsider the pricing formula for bus fares and deploy a flexible pricing structure with the proposed pay card system where buses can charge a higher fare if they operate at night.

A test run has already been done with the participation of some cabinet ministers in this Government.

Given lower fuel prices in the world market, even a concessionary rate can be provided for public transportation to encourage them to operate at lower costs, considering the damage to the environment.

Simultaneously, the Railway Department requires more competition. The Government can consider keeping the ownership of the railway tracks with the Department and provide private investors with the space to join in a public-private partnership to run train compartments, operations, and cargo. If we can check the location of our tuk-tuk taxi, obviously it isn’t rocket science to develop an application to monitor the arrival and departure times and locations of trains. 

Most of these regulatory reforms won’t affect the Government’s fiscal position, and we should look at options to take maximum mileage of market-based pragmatic solutions rather than inefficient government interventions.

When public transportation sees significant improvement, the Government should consider imposing a congestion tax as done in London, where vehicle entry to the city is expensive, so more people are encouraged to use public transport and congestion is discouraged.

The current higher taxes on vehicle imports is a blanket tariff which has no impact on reducing congestion. When the public transportation is up to the mark, vehicle imports (mainly low efficiency-engine vehicles) will automatically drop, so the Government will not have to crush the dreams of aspirational Sri Lankans progressing to four wheels from two or three. Additionally, the Colombo Municipality will earn extra revenue via the congestion charge. 

Last but not least, the Government should abolish the vehicle permit system and treat all its hard-working residents equally. The vehicle permit system has indirectly allowed daylight robbery of taxpayer money, and of course, it has to be kept active for political reasons. This is the golden opportunity to move from the “do nothing” seat to the “do reform” seat, and we should not waste this crisis without making reforms in our public transport system.

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.

Monster monopolies

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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By Dilshani N Ranawaka

Rukshani, is a small business owner running her own grocery store. Her peak hours of business are when everyone gets back home from their jobs around 7-8pm after working in Colombo. Unfortunately, she has been struggling to make ends meet as of late, due to power cuts that are also scheduled in her area around the same time as her peak hours. With just candles lit during these hours, refrigerators and coolers switched off, it adds an additional cost for her to operate her business.

Thilina, who works in Colombo faces a challenge of getting back home as the workers of the Railway Authority have decided to go on strike asking for a pay raise. Even though trains are over-crowded, they are unfortunately the fastest way of commuting back and forth. Alternatively, Thilina has to resort to the next best solution in his capacity; buses, which incurs an additional cost to reach home.

How is that Rukshani and Thilina have no say over the situation? Why does Rukshani have to suffer losses during the peak hours of her business and why should Thilina have to look for alternative transportation for something they are capable of paying, but somehow is beyond their control?

Trains and electricity are two vital services for the day to day functioning of the country. Why do these authorities continue to function when they are failing to provide reliable and efficient services to their customers who pay for these services? They have a monopoly over this service, hence they exploit it.

As of 2017, Sri Lanka Railway (SLR) sums up for Rs. 7.5 billion in losses. The Central Electricity Board (CEB) projects of Rs. 89 billion in losses for 2019. An island-wide poll by Sparkwinn Research, commissioned by Advocata Institute indicates that 81% of the sampled population are not satisfied with the performance of the State Owned Enterprises (SOEs). As the numbers have spoken, people are clearly not in favour of having these underperforming SOEs.

Would a private institute still run under these terrible, burdening losses?

The issue mainly starts with the monopolistic control over services complemented with organized trade unions within these public institutions. The fact that these services do not have competition, offers a fundamental background for wage increases and other demands that usually result in strikes which influences the entire population.

The initiation of these services dates back to the years when the private sector had inadequate resources to facilitate these services. In such conditions, the government established these entities for the benefit of the population. However, due to the monopolistic nature of these establishments, workers were able to unionize forcing the government to lose control over these institutions.

To add on to the burden of failures, is the fact that all these are controlled and heavily subsidized by the government. The lack of incentives to improve their efficiency and productivity are therefore felt heavily by the government.

There are common practices of addressing the issues on monopolies of the economy. Incentivizing merger policies, regulating and controlling the quality of these monopolies and price caps are some of the methods developed countries use to provide better services.

The “P” word; “privatization” is a taboo in Sri Lanka, although it is commonly agreed that the process of privatization paves the way towards an answer to address these issues that burden the entire economy.

“Privatization” in Sri Lanka is identified as “transferring an institute from public ownership towards private ownership”. This is only one such form of privatisation and is known as a “complete privatization”.  However, there exists various forms of privatizations such as transferring assets, Public-Private Partnerships and franchising.

Path towards privatization

The process of privatization should be methodological. Montreal Review (an independent online magazine) identifies few principals that would lead to an efficient privatization process.

1. The purpose of privatisation

2. The need to review different methods of privatisation

3. The extent of the privatisation

4. Recognising constraints

5. Finding a buyer

6. Implementing an investor friendly environment to attract investors

How the United Kingdom excelled in their privatization process of trains and telecom are case studies which could be replicated in Sri Lanka. The United States government remained in control of quality control and maintaining standards while the operations were handled by private sectors. On the other hand, the United States had successfully privatised industries with natural monopolies such as water and electricity supply by the privatization of operations with the government remaining in control of providing the role of maintaining standards while removing excess burden on the budgets.

However, given the extensive amount of State Owned Enterprises (SOEs), an initial step towards privatization could be to list down possible institutions or even better, towards creating an index which could be a measurement towards qualifying for privatization process.

Can we breakdown these natural monopolies? Are monopolies simply an excuse that gives the governors the luxury of political lobbying? Something to think about.

“The very term “public consumption products” is an absurd one. Every good is useful “to the public”, and almost every good may be considered “necessary”. Any designation of a few industries as “public utilities or services” is completely arbitrary and unjustified”  - Murray Rothbard, a prestigious American Economist.

#StrikeSL; A call for rail privatization?

Originally appeared on The Daily Mirror and Daily FT

By Anuki Premachandra and Dilshani Ranawaka

THE BACK STORY

The Railway strikes are over. At least for now. On August 8, several railway unions called a sudden strike in the afternoon hours, right before tired office commuters would flock the Fort railway station to head home after a long day’s work. For the rest of the week, the railway trade unions crippled a key part of the transportation system in the country. The headline “Railway strike continues” overwhelmed papers, news and social media alike.

This was the 14th time since 2017 the railway unions decided to strike, putting their demands ahead of the needs of more than 350,000 daily commuters. But this time, commuters have had enough! Angry commuters turned against the unions and the government, some even calling for the privatisation of the train service. This most recent 5 day strike is said to have caused a departmental loss of 64 million rupees leading to an increase in future railway ticket fares by 15%.

A call for privatization? #lka Railway dept. losses: 2016 - Rs 6.8bn and 2017 - Rs 7.5bn. #strikeSL https://t.co/1XVp38xLy9 https://t.co/FSSipWxwiI

— Advocata Institute (@advocatalk) August 10, 2018

Is the call for rail privatisation practical? Financials of Sri Lanka Railways (SLR) for the past few years show that the losses made are as persistent and routinely as the losses made by Sri Lankan Airlines.

If SriLankan airlines is in “restructuring” basket, why isn’t Sri Lanka Railways?

DECIPHERING THE FINANCIALS

Sri Lanka Railways Performance Reports and Central Bank Annual reports show that SLR has been incurring operating losses of 7.7 billion rupees in 2015, 6.8 billion rupees in 2016 and 7.5 billion rupees in 2017.

Source: Annual Report, Auditor General’s Department, 2016

A big component of Recurrent Expenditure, that makes up a portion of ‘Operating Expenditure’ is salaries and wages. This recent train strike by railway trade unions erupted due to a demand for higher salaries for railway staff. Recent pay sheets published by the Ministry of Transport’s Media Division, shared vehemently via Social Media, show that the monthly earnings for certain categories of staff at Sri Lanka Railways are many times the wages of the average worker in the private sector.

#railwayStrike for pay hike 💰💰💰...
here is engine drivers, controllers and station masters current earnings who is called current #StrikeSL

Pay sheets published by ministry of transport media division. #lka #SriLanka pic.twitter.com/V73UhpnyKm

— Sandun Arosha F'do (@sandunarosha) August 9, 2018

Sri Lankans are naturally outraged that the money pumped into the system both as commuters and taxpayers are having such a poor return of an inefficient service and sudden strikes.

Another side of the coin are the low fares charged by the commuters. Fares per kilometre range from 50 cents to a maximum of Rs.2 for 2nd and 3rd class travel. 1st class fares range from Rs.1.60-3.60 per kilometre.   

The result is that railway revenues are not even sufficient to cover the salaries of workers.  In 2016, salaries exceeded revenue by 32%. This is not a recent problem. Expenditure of the railways exceeded revenue by 52% in 1968, roughly the same as 2016.

Successive governments have preferred the status quo over bold reform, which will face resistance from both unions and commuters.  

But reforms are needed. What are the options?

IS THERE A SOLUTION IN PRIVATISATION? 

Given political realities, wholesale privatisation is not a realistic option. Even if politics can be maneuvered - an unlikely scenario - the government would be hard pressed to find a private investor willing to take on such a large and risky investment.

The World Bank in a discussion paper on railway restructuring and privatization, identified certain significant models driven out of case studies of the developing world, that could be applicable to Sri Lanka. A few successful reforms are to offer stocks to separate companies (based on various scenarios such as geographical factors, purpose etc.), design multi-phase enterprise development programs and, restructure and concession loss making SOEs.

In the case of SLR, the restructuring process could be through Private-Public Partnerships (PPPs). Realistically, short-term reform objectives should be to introduce competition where possible, and structural reforms that increase accountability.  Private sector involvement could help in areas such as freight, real-estate management, catering, and tourist or “luxury” coaches as experimented earlier. A system that welcomes private involvement and breaking the state monopoly is the long-term solution to service delivery issues on railways.

A likely success strategy is to get the private sector involved in a more advanced train service altogether. Work on the Colombo Light Rail project is currently underway and this is an example of where the asset’s ownership will lie with the state, but the private sector will run the operation of it.

Currently,  the SLR operates as a monolith department.  It’s official classification makes it a notable absentee from the list of 55 ‘strategically important’ state enterprises compiled by the Finance Ministry.  

A first step towards accountability is to split the rail track and station operations from the actual running of train services. This allows for an environment where private operators could enter into train operations and other services on their own terms, resulting in a more competitive system. Competition will no doubt increase service delivery and choice.  

The alternatives are not entirely new and like in the past, even this limited proposal will be opposed by the unions. But, reforms tend to happen in crisis; when people reject old ideas and look for new ones. With organic calls for privatisation, that time may be approaching for Sri Lanka’s railways.

Sri Lanka Railways: A snapshot of issues and ideas for improvement

Originally appeared on Daily News

By Ravi Ratnasabapthy

Several railway trade unions launched a lightning strike last Wednesday over salary anomalies. The strike was called off after four days but hundreds of thousands of commuters were stranded. Angry commuters took to the streets, some called for privatisation of the railways.

Sri Lanka faces a huge problem with public transport which is driving commuters to use private transport. A study by W.J. Weerawardana [1] estimates that 65% of the road space is used by 38% of the passengers; the increase in the use of private vehicles is the major cause of traffic congestion.

At rush hours and school times the traffic is almost at the point of gridlock. Parking is a also a problem. If even a half-decent public transport option were available many more commuters would use it

Standards of service at the railway are shoddy and reforms to railways must form a part of a larger plan to fix public transport. A summary of some key issues follows, with some ideas for improved services.

• The railways lost 6.7bn in 2016 (7.7bn in 2015). The railways appear to have been losing money since 1947 [2]. The expenditure of the railways exceeded costs by 10% in 1950 but by 1968 this had grown to 52.4%. The wages policy of the government and the policy limitations imposed by the government in the pricing of passenger and goods transport were factors that contributed to this situation [3]. This has not changed much: in 2016 costs exceeded revenues by 49.4% (2015: 45.09%) for broadly similar reasons.
• Fares per kilometre range from 50 cents to a maximum of Rs.2.00 for 2nd and 3rd class travel. 1st class fares range from Rs.1.60-3.60 per kilometre.
• Revenue does not cover even salaries. Salaries exceeded revenues by 31.89% in 2016 (28.9% in 2015).  
• Only 42% of the trains run on time (39% in 2015). Delays exceeded 10 minutes for 43% of the trains (46% in 2015).
• The assets of the railway or poorly utilised. Income from leases of railway land was Rs.119.58m in 2016. Lease arrears not collected amounted to Rs.1.8bn at end 2016 [4]. The Auditor General notes [5]: “Lands  about 12,000 acres in extent belong  to  the Department  of  Sri  Lanka Railways had remained idle for about 150 years without giving on lease or utilizing for another purpose”

COMMENT:

Fares are priced well below operating costs, the trains grimy and overcrowded. Maintaining rail fares at uneconomically low levels is politically attractive but has lead to the deterioration of the rolling stock and infrastructure due to a lack of funds for new investment.

There has been a steady increase in passenger numbers from just under 100m in 2011 to 136m in 2016, but the service does not appear to have been able to respond adequately to new demands for expanded services or improved quality.

Based on the current operating and cost structure fares would need to double to just to meet recurring expenses and rise still further if the capital expenditure is to financed.  The Government spent Rs.30bn on capital expenditure in 2015. (2014: Rs.34.6bn, 2013: Rs.20.2bn). While a significant fare increase is needed and may be accepted if accompanied by improved service, passengers cannot expect to pay for inefficiency. For example, the COPA [6] has questioned excess staff recruitment (of 1588) and payment of overtime in contravention of the Establishment Code.

Thus there is a need to restructure of operations to improve service quality and efficiency. In a lecture delivered last year at the Chartered Institute of Logistics & Transport, Dr Priyanka Seneviratne claimed SLR’s weaknesses stem mainly from lack of timely investment in fleet replacement, technology, and workforce development in the past. The Ministry of Internal Transport [7] confirms that 65% of the rolling stock is over 30-35 years old which increases the likelihood of breakdowns, increases maintenance costs and impairs service quality.

Dr Senevirate identified the following measures to enhance revenue:

1. adjusting fares and tariffs to better reflect costs and improved services;
2. leasing more real estate and advertising space at market prices, and
3. partnering with the private sector to provide freight and ancillary services such as catering, courier, and real estate management.

The railway currently partners with the private sector to provide a luxury carriage on selected routes. This could be expanded to cover other routes or possibly even to a whole train, covering for example additional services at peak times to cater to office commuters. Service contracts where, for example, railway catering is contracted out could provide increased revenues and improve service. Operations of toilets, canteens could be handled in a similar manner. Idle land could also be redeveloped in partnership with private developers. 

The dilemma is ensuring that a public-private partnership is beneficial when corruption is endemic and state capacity is limited. The following principles are an outline of process that should be followed:

1. Open bidding- public-private partnerships must be procured by competitive tendering.
2. Public consultation: submission of the draft invitation to tender and the draft contract to public consultation, which should be advertised in the newspapers and in electronic media, informing the arguments for contracting a partnership, the scope and term of contract, its estimated value, setting a minimum period of thirty days for comments and suggestions.
3. Capacity and institutional integrity in contract design. Some PPP contracts can be extremely complex and public officials may be overwhelmed. Capacity building within the public sector is essential. Setting up an independent PPP advisory unit within government staffed by competent people is advisable. Judicious use of external advisors may be necessary, depending on the nature of the contract.
4.  Where possible standardising parts of the contract reduces conflict, enhances, predictability, minimises misspecification and reduces transaction costs. 
5. Public disclosure of principal contract terms.
6. Post implementation monitoring of contracts to ensure value is delivered.

Sri Lanka’s railways are a drain on the treasury. With tight budgetary constraints the Government will face increasing difficulties in allocating adequate resources to maintain, let alone develop, the railways.  The railway is an important component of transport infrastructure and improving its efficiency will contribute to the overall productivity of the economy.

Creating competition and private participation in the in the supply of services, utilisation of idle assets and supply of railway infrastructure could enhance efficiency and improve service. The Government should explore these options.

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[1] Weerawardana W.J., Reduction of traffic congestion in Colombo city by improving public bus transport.

[2] Enhancing the Efficiency of the Sri Lanka Railways and its Contribution to Transportation, Sisira Kumara, Economic Review Aug/Sept 2011

[3] Ibid

[4] Auditor General’s Department, Annual Report 2016

[5] Report of the Auditor General on Head 306-Department of Sri Lanka Railways-Year 2015

[6] First Report of the Committee on Public Accounts (from 01.01.2016 to 07.04.2016).

[7] Ministry of Internal Transport, Performance Report 2014