Opinion - Sri Lankan Airlines, sour or to sour?

J. Lorenz writes on Lanka Business Online, about Sri Lankan Airlines:

"Although the government inherited a profitable business in 2008 they successfully managed to run it into the ground due to mismanagement and corruption. The two explanations available are the Jensen and Meckling (1976) theory of ‘principal-agent problem’ and the free-rider problem, both of which concern self-seeking individuals, as discussed at the launch of Advocata Institute at the Lakshman Kadirgamar Institute earlier this month.

Managers of state owned firms are aware that salaries would be paid regardless of performance of the company hence motivation to perform is taken away thereby embodying the free-rider problem. Further, tax-payers would continue to pump money into failing SOEs whereas a private company would pump their own money into the business risking everything, hence increasing the commitment to perform well. The budget funds given to SOEs in 2014 is equivalent to every household paying 24100 rupees to keep SOEs afloat. This is while around 40% of Sri Lanka’s households earn less than 24000 rupees a month"

Read the entire article on LBO