Ravi Ratnasabapathy

Sri Lanka’s political system: A Failure of Governance

Originally appeared on Groundviews

By Ravi Ratnasabapathy

This essay examines failures of governance in Sri Lanka. Although discussed within the context of State Owned Enterprises (SOE), they affect many other aspects of public life.

The weaknesses in the governance of SOEs stem from those embedded within the larger political system. These problems can be assessed by an examination of the political system, understanding the incentives of actors and the effectiveness of institutions in directing these towards the public good.

Some examples of general weaknesses in the political system

  1. The power of interest groups

  2. Campaign finance

  3. Weak parliament and committees

  4. Citizens as shareholders

The power of interest groups

People may commonly assume that political actors are mainly concerned with public interest and that the state exists to carry out the wishes of the public.

Unfortunately, the State is made up of people and the dominant motive in people’s actions in the marketplace – whether they are employers, employees, or consumers – is self-interest.

When individuals become politicians they do not suddenly abandon their personal interests and turn into public-spirited individuals who make morally correct decisions in the ‘public interest’.

While most people will base some of their actions on charitable instincts only in rare cases are these likely to be primary motives. Politicians are no different, acting to please interest groups that support them, pushing policies that lead to re-election and pursuing other personal agendas.

 Politicians take collective decisions. They are made by politicians on behalf of the public, and not by the public themselves. All decisions involve a trade-off in costs and benefits but when an individual makes an economic choice, they experience both the costs and the benefits. Thus, they will only act if it is in their interest.

In collective decisions, whether they involve giving jobs to graduates or building a road, the beneficiaries (e.g. graduates, road users) are not always the people who bear the costs (taxpayers or homeowners whose property is lost). Further, in a market transaction both sides have to agree, if either disagrees, they can walk away. In political decisions those who disagree cannot walk away, they are bound to accept the decision and bear whatever costs the collective choice demands.

Therefore collective decisions, unlike individual ones, carry wide implications. Good politicians should weigh overall costs and benefits on our behalf to determine if ‘social welfare’ might be increased by the right choices. The question is do Sri Lankan politicians have the motive; or even the capacity, to do so?

When political decisions are made how do we determine what is ‘best’ for ‘the people’? Society is complex, made up of different groups with different interests. The young may be interested in education and jobs, but pensioners may be more concerned with old age security and health care. An ageing population may vote for increased pensions, but if this is achieved at the cost of lower spending on education the young may lose. Different decisions involve different stakeholders with varied interests, making it difficult to identify a single ‘public interest’.

When collective decisions are taken a choice will be made between many competing sets of interests: but only one set of interests can win. Politicians face conflicting pressures from lobbyists, businesses, family and friends. Those with the greatest leverage will win. This is not the same as saying that policies that bring the greatest social benefit will win.

Small, homogeneous groups (trade unions like the GMOA or businesses) find it relatively easy to organise and have a great deal to gain or lose when collective decisions go for or against them. The opposite is true with large groups, such as consumers or taxpayers.

With large groups the impact of collective decisions on a single member is small so they have little incentive to lobby. Being so diverse, they are also difficult to organise.

The result is that concentrated interest groups have a powerful incentive to organise and campaign for policies that will specifically benefit them. By contrast, the general public, with very diverse interests, have little motivation to put effort into public debate.

The protective tax (roughly Rs.10) on a loaf of bread may not amount to much to a consumer but to the flour millers this represents a gain of around Rs.20 billion a year.

When particular groups manipulate policy to win preferential tax or legal privileges this results in a substantial transfer of wealth from the public to privileged groups. In Sri Lanka the practice is widespread; witness the plethora of special tax concessions (about 200 according to the Finance Minister) exclusive import licenses, permits and protective tariffs.

Campaign finance creates incentives for corruption and poor governance

Limits on campaign spending and the need to disclose sources were removed in the 1978 constitution, opening the floodgates. This excludes the majority of citizens, including the educated, from politics.

There are no accurate estimates of the cost of an election campaign but a former Secretary General of Parliament recently stated that this was in the region of Rs. 60-70 million. Conversations with other commentators produced estimates between Rs. 50-100 million, rising to Rs 150 million for those fighting for preferential votes.

The proportional representation system has increased constituency size (campaign costs are proportional to constituency size) while the preferential voting system intensifies political competition (not only must candidates battle other parties, they must also fight within the party). The combination has sparked an arms race in campaign spending.

While costs are lower outstation they are still substantial and far beyond the lawful earnings of an MP who earns a monthly salary of Rs. 54,285/- plus other allowances of around Rs160,000/-.

Politicians turn to wealthy backers, some connected to the underworld, to fund campaigns and provide labour-in return for political protection or rewards. The result is that a group selected on the basis of access to cash and a workforce – not intellect or ability – enters Parliament. Moreover, the need to recover campaign spending means they come into office under obligation to their sponsors, carrying an inbuilt incentive to corruption.

This has undermined the technical capacity of the state; how can proper policy be formulated if the politicians and bureaucrats are ill-qualified to perform the necessary analysis? The bureaucracy has an important role in policymaking, providing objective assessment of policy options, drawing on experience and practical considerations. Unfortunately, decades of nepotism have sapped its capacity. The concept of independent policy analysis does not exist in Sri Lanka, leaving a vacuum vulnerable to capture by special interest groups.

Weak Parliament and committees

Political actors will pursue their own interests, but functional governance systems can check the worst of these impulses. The most important is parliament, which works through questioning government ministers, debating and the investigative work of committees, principally the Committee on Public Expenditure (COPE) and Committee on Public Accounts (COPA) which scrutinise expenditure.

Unfortunately, serious deficiencies exist. Engineering crossovers in return for political office reduces Parliament to a rubber stamp. Thus there is little incentive for MPs to take Parliament seriously. Many don’t even attend.

An analysis showed that less than half the MPs attended at least 75% of the sessions. Even those who attend remain in the house only for the first hour. Attending funerals or weddings is the priority; they recently voted themselves a new monthly allowance of Rs.100,000 for gifts at functions. Once elected, the goal is Cabinet appointment, as this presents opportunities for gain or furthering political careers. Once ensconced, the incentive is to enjoy office, not to risk the privileges by questioning authority. The multiplication of the Cabinet is driven more by the need to lure opposition MPs to maintain a rubber-stamp majority than strictly functional requirements.

The committee system is also weak. Until recently they were ‘Consultative Committees’ chaired by a Minister and structured to aid the executive than hold it to account. With the major overhaul of the system [1] by the Yahapalanaya government – a significant if little known reform in the last three years – these are now known as ‘Oversight Committees’ and their function is now much better geared to scrutiny and accountability-but much more needs to be done.

COPA/COPE are under-resourced; their reports complain of a lack staff (particularly audit) and proper IT systems. Further, the government is not required to act on the recommendations of these committees (although ministers must now respond to findings) within any stipulated period of time, leaving the accountability loop open.

Despite many limitations, these committees have uncovered multiple grave malpractices that point to fundamental control weaknesses. The fact that only a minority of institutions seem able to furnish an unqualified audit report suggests much more lurks undetected.

Citizens as shareholders

If politicians do not hold SOEs to account can citizens, the ultimate “owners” exert any meaningful oversight? Unfortunately not because:

  • They have no legal standing as owners;

  • The fragmented nature of the “ownership” creates a collective action problem: no one citizen, even ones who are seriously interested, has an incentive to bear the costs required to monitor the managers.

Oversight is costly, and time and effort must be spent on monitoring performance if malpractice is to be detected. This task is made more difficult as citizens lack ready access to information. As no direct rewards accrue to a diligent citizen from such action there is little incentive to expend the effort to do so; citizens depend on politicians to do this. As discussed previously, the politician has no clear incentive, especially since they are not held accountable for poor performance.

The main mechanisms to address these two layers of agency costs are corporate laws and political and legal institutions. The weaknesses of the political institutions have been discussed above and corporate law are rarely enforced on SOEs.

To take a few simple examples; of the 55 large SOEs only ten had published an annual report for 2016, as per the 2017 report of the department of Public Enterprises. (The law requires publication within six months of the year’s end. Timely disclosure is essential in a robust corporate governance framework as it provide the basis for scrutiny for stakeholders.) Thirty were two or more years in arrears.

Sri Lankan Airlines has suffered a Serious Loss of Capital [2], but the legal procedures that must follow have been ignored. Even the labour laws are not enforced-the JEDB has unpaid EPF liabilities of Rs.323m but earns no sanction.

Therefore, the performance of SOEs suffers from both political costs (i.e. the costs associated with control of firms by politicians who have political goals that differ from economic efficiency) and agency costs (i.e. the costs resulting from managerial pursuit of private benefits at the expense of the firm), leading to chronic inefficiency and underperformance.

Conclusion: a dysfunctional state that serves political interests

The political process incentivises corruption. A weak governance regime means little accountability and few checks on government spending. In addition, limited technical capacity means policy is open to “capture” by special interests. The combination is deeply dysfunctional: a parasitic system that transfers wealth to the politically connected through corruption and rent-seeking.

The weaknesses in the political system are discussed here in order to place the context within which the agency and political costs of SOEs are experienced. Poor oversight magnifies these costs. In combination with the perverse incentives of politicians it gives rise to the blatant breaches of fiduciary responsibility that occur, repeatedly in the COPE reports.

All political systems need to mediate the relationship between private wealth and public power. Those that fail have dysfunctional governments, captured by wealthy interests.

The ramifications of this are far-reaching. Although a full discussion is out of place here, structural weaknesses could explain why a massive expansion in state activity has yielded minimal visible benefits to citizens. Between 2005-15 total government spending quadrupled (from Rs.584 billion to Rs.2,290 billion) with little noticeable improvement in essential services; transport, health, education or waste disposal.

The money is swallowed up in a massive administrative machine. There is endless duplication in the 32 cabinet ministries, 3 non-cabinet ministries, 107 departments, and 24 spending units, 452 SOEs just at the centre. Most developed countries make do with about 20 ministries.

The problem with endemic corruption is that public officials, both bureaucrats and politicians, may redesign programmes and propose projects with few public benefits and many opportunities for private profit.

In Sri Lanka, patronage wins elections which may be why we have 166,588 peons and 25,645 drivers in public service (but only 19,612 medical officers and 32,399 nurses). The public sector workforce ballooned from 850,267 to 1.35m between 2005 and 2016.Salaries and pensions consume almost half of all tax revenue. Much other government expenditure has been funded by debt: but it is only now; when debt is repaid-and taxes rise, that the true cost becomes apparent to the public.

Structural problems require structural solutions; changing the identities of the people who hold public office will not suffice.

A concerted effort to improving oversight is needed, to overcome the resistance from within (as it is not in their interest). The National Audit Bill to strengthen the Auditor General’s role to increase accountability was only passed in July 2018, after being held up since 2003. Requests to open the COPE/COPA hearings to the public by the Committees’ themselves have gone unheeded.

Improving accountability and governance within State Owned Enterprises is important because of the large leakages that take place, but this will address only the subset of a larger problem.

Sri Lankan intellectuals have long placed great faith in government but given the quality of governance the role that the state should play in public life should be reassessed. The governance mechanisms are what ensure that state activity delivers benefits to citizens. A state that exhibits high levels of governance may be trusted to play a larger role, whereas one with weaker governance should only play a smaller role.

Keynes stated the function of government: it should do only what the people could not do at all, not what it could do better than the people. Our objective should be a state that performs a limited and well-defined number of tasks to which it is suited and has the requisite capacity.


[1]. Ministers are now required to submit responses to committee findings (previously they could be ignored), COPE follows the convention of being chaired by an opposition MP and non-COPE members of Parliament may now observe its proceedings

[2]. As per Section 220, if it appears to a Director of a Company, that the ‘net assets’ of the Company are less than 50% its ‘Stated Capital’, then the Board, within 20 working days of such fact becoming known to the Director, shall call an Extra-ordinary General Meeting of the Shareholders to be held, not later than 40 working days from the date of calling of such Meeting. Sri Lankan Airlines has lost the entirety of its capital and now has a negative capital.


Sri Lanka has a total of 527 State Owned Enterprises out of which regular information is available for only 55. The inefficiencies and mismanagement which riddle our SOEs are explored in the Advocata Institute's new report  “State of State Enterprises in Sri Lanka- 2019"

To read more on SOEs and download full report visit www.advocata.org

Cheap footwear imports benefit ordinary Sri Lankans

Sri Lanka's footwear industry has written to the Director General of Customs requesting a crack down on illegal imports of footwear.

The industry claims that Sri Lanka is losing over US $112.5 million annually in foreign exchange as a result of cheap footwear imports from China and India. The industry estimates that the state should have gained revenue of around Rs. 9 billion if proper taxes had been paid on the import shoes

Local manufacturers are supposed to be on the verge of collapse as they cannot compete.

The industry has made repeated calls for protection following the reduction of duties on imported sports shoes in the 2011 budget. Successive governments since 2002 have introduced tariff barriers to protect the local footwear industry but some duties were reduced in 2011.

Shoe makers claim that illegal imports are mainly factory overruns, stock lots and inferior quality products and are available in the market for less than Rs. 750 which is below the minimum total custom tariff on footwear (CESS Rs. 600 +PAL + VAT and NBT). Consumers who were befuddled as to why shoes are so expensive in Sri Lanka now know why.

Yet, only last month the Minister of Industry and Commerce Rishad Bathiudeen, speaking at the Footwear & Leather Fair remarked that Sri Lanka's footwear and leather exports have increased by 28% in 2016. "Our footwear and leather exports in 2016 increased by 28% in comparison to 2015 revenues to $140 Million showing strong growth trends”.

It is clear that the problem is not as straightforward as the industry claims. The local shoe industry seems to succeed competing, at least on some level in the global market. If they compete abroad they should be able to compete in the domestic market, why is there a need for protection? 

Let us try to assess the relative benefits and costs of protecting the local shoe industry.

The industry maintains that letting consumers buy cheap imported shoes threatens the jobs of 40,000 people employed in the industry island wide.  The producers have requested that the duty structure that prevailing before 2011 be reintroduced. Duty on shoes was 30 per cent or Rs. 1000 per pair whichever was higher. Addition to duty, a CESS of Rs. 500 was levied per pair. 

This is a significant additional cost that consumers are burdened with. Additional costs will be a source of particular anguish to the parents of the four million children who attend school and whose shoes would need to be changed almost every year. All children have in common a constant need for new clothes and shoes as they grow. Kitting out youngsters for school can be expensive; those who participate in sports may require several different types of shoes, placing a heavy strain on family budgets.

The effect of import duties is to raise the price of both foreign products and domestic goods. These policies may “save” the 40,000 jobs in the industry, but only at the expense of the overall welfare of consumers. The annual shoe requirement locally is around 40 million pairs; a greater part of the population needs to pay higher prices on shoes in order to support the footwear industry.

Trade protection temporarily helps some producers, but it cannot do this without harming others. Who is affected by higher import duties? First consumers who either buy an imported shoe or a local shoe sold at a high price. Remember it is not just a case of an imported shoe being sold at a high price and consumers turning to local shoes instead. The purpose of the duty is to enable local products to be sold at higher prices (benefiting manufacturers) than would otherwise be possible.

Since they pay higher prices, consumers would have less money to spend on other goods, indirectly hurting various other trades. Due to high prices people will buy less; they will manage with broken or worn out shoes without replacement. Shoe traders and retailers, who sell imported shoes, will also suffer from reduced business.

Various arguments are put forth to support protectionism; to protect sunrise (infant) industries, sunset (declining) industries, strategic industries (energy, water, food etc.), save jobs or deter unfair competition.

When firms within certain industries call for protection, for whatever reason, policymakers must view the issue from the perspective of the consumers as well and weight the relative merits of the claim. Consumers do not form associations and lobby for their interests, unlike businesses, so Governments are under little pressure to look after consumer interests. Yet, in most instances the number of consumers far outweighs the number of producers or the number of jobs concerned. Often, the real goal of the industry is to gain security through the removal of competition.

Certainly, if duties are lowered, some workers in the footwear industry may lose their jobs and some or all of the firms may be forced to close by the foreign competition. The indsutry claims that 2000 cottage type businesses may have to close.

Workers will have to look for employment elsewhere. However, other job opportunities will be made available since the money that consumers previously had to pay for duties could be used to buy new products or services or consume more of already existing products and services. Employment is created in other sectors because resources will flow to areas that consumers consider being of highest value to them. 

It is rather ironic that while the industry focuses on opening markets abroad it is keen to keep the domestic market as protected as possible, in the interest of maximising exports and minimising "harmful" imports. It is fortunate that the export destinations for Sri Lanka's shoes are more open than Sri Lankas' home market.

In general, tariffs promote the production of items in which a nation is inefficient and deter other production lines in which the country has a comparative advantage. By reducing tariffs, things that could be produced more efficiently in one country would be made there and items that could be purchased less expensively abroad would be imported.

In the 1950’s, Britain attempted to protect its famed Lancashire textile industry through restraints on imports.  At best, this may have prolonged its decline, but it did nothing stop it.  Low-cost textiles were being made on a mass scale by foreign competitors.  Eventually the Britain’s textile industry moved to high added value luxury and designer products that sold at a premium in both domestic and foreign markets.  Some UK textile products have become world-beaters, without the need for subsidies or tariffs to protect the jobs they sustain.

Some of Sri Lanka’s shoe exporters are already competing effectively in the world market. Reducing import duties on shoes would benefit consumers and would spur the local industry to improve efficiency and towards greater innovation, to the long term advantage of all concerned.

A version of this article previously appeared in the Ceylon Daily News.


Ravi Ratnasabapathy is a Fellow of the Advocata Institute and a management accountant by Training.

The government aims to regulate e-commerce. It shouldn't.

A version of this article appeared on  Daily News

The Sri Lankan government reportedly intends bringing legislation to regulate e-commerce businesses operating in the country. The Finance Minister was quoted as saying “They (e-commerce operators) are just operating here. Where is the regulation for that? We will make them bring money earned there back to the country.” If this were enacted it is quite likely that Uber, Agoda and Booking.com; the businesses which have earned the ire of the Tourist Hotels Association of Sri Lanka (THASL) and the Rent-A-Car Association would pull out. These associations have lobbied for regulation.

Sri Lanka’s domestic market is small and the volume of e-commerce is smaller still. For a global company the hassle of incorporating a local office, opening bank accounts and grappling with the local administration would not be worthwhile. They would almost certainly leave.

The Hotels and Rent-a- car association have not made a clear case for their position. Consumers however would be left worse off facing higher prices and more limited choice.

Tourist arrivals

The informal tourist sector is now the fastest growing segment of the market, catering to as much as 40 percent of the tourist arrivals to the country. Internet booking engines are the lifeblood of the sector; small guesthouses depend almost entirely on them to reach their clientele.

Budget tourists, who form the majority of visitors to guesthouses cannot afford the prices of star-class hotel. Close the booking engine and we close the door to the budget tourists who will head off to India or Southeast Asia spelling certain doom to the 8,000 plus small guesthouses scattered across the country. Some mid-range tourists will choose to pay the higher rates at hotels and still come but many will not.

The beauty of allowing small guesthouses to flourish is to broaden the income earning opportunities for people with a minimal investment. Householders rent out extra rooms in their own houses, with a little refurbishment; upgrading the toilets, installing hot water and perhaps airconditioning. The money earned goes direct to the hands of local families. Further, budget tourists will patronise local shops and restaurants, offering an easy path to improved living standards.

Mark P. Hampton is Senior Lecturer in Tourism Management at the University of Kent, notes that:

My own research in Indonesia, Vietnam, Thailand and Malaysia since the mid-1990s shows that as backpackers tend to consume local products (food, coffee, beer, cigarettes etc), stay in small guest houses, and use locally owned ground transport, more of their expenditure is retained in-country than in conventional mass tourism.

Economic leakages from backpacker tourism are also significantly less than for conventional (foreign-owned) tourism, since backpacker businesses are usually locally owned and profits tend to be retained within the developing country rather than flowing overseas to international hotel groups.

Traveller reviews

Depriving these people of opportunities to better themselves in order to benefit large-scale hotels seems perverse. The booking engines do charge the guest houses a fee but the bulk of what is spent by tourists is retained locally.

What about maintaining minimum standards?

In the pre-internet era there was a problem of standards. How does a visitor know what to expect? This is the origin of the star ratings in hotels, a means to indicate standard.

This is no longer a problem. Booking engines work on the basis of traveller reviews. Visitors post their ratings of the places they stay, those that receive poor ratings are less likely to be patronised. Essentially, standards are enforced by the visitors themselves which is why this model has been so successful.

Previously the hotel industry successfully lobbied for the imposition of minimum room rates and there have been recent attempts to restrict short-lets on apartments which were seen as a threat by the hotels. Now they seek to restrict the informal sector.

Hotels in Sri Lanka need to understand that tourism is a global industry; their competition is not only domestic it is regional: from Malaysia, Thailand and Indonesia. A good number of hotels in these countries offer lower rates than the average in Sri Lanka and overall travel costs are rated to be much cheaper, as comments from tourists on the popular TripAdvisor website testify:

“There is no question whatsoever that Thailand is much cheaper than Sri Lanka and with higher quality. On average, all things being equal, Thai hotels are half the price of those in Sri Lanka and there are lots to choose from especially in the low price category.” or

“Sri Lanka is a compact island offering beautiful vistas, cultural, historical and religious sites, beach and river activities, hiking . . . all year round, taking into account the weather patterns. With ten days and proper planning, you could see and do a lot. Compared to Malaysia and Thailand many of the things you might want to do are more expensive.”

Business-friendly destination

The Sunday Times reported that when a Singapore hospitality expert asked in 2014 for a package tour of Sri Lanka, the offering was similar to that she had experienced 10-15 years ago. “It was no different. I have been visiting Sri Lanka for many years and the package was the same as 10-15 years ago. Attempting to cripple the competition locally will not improve the position of Sri Lanka’s hotels regionally and will be the detriment to the wider tourism industry.

It may also be detrimental to local Tech Startup ecosystem in general as Sri Lanka will come to seen as a place with backward and uninviting regulations at a stage the country’s tech community is desperately trying to position it as a place of innovation and attract investors. Instead of lobbying for strangling regulation the lobby groups need to reexamine their value proposition and adapt. On the government’s part, it should stay out of an industry where the average regulator and legislator has minimal understanding. Cumbersome rules will reduce Sri Lanka’s attractiveness as a forward looking business-friendly destination for FDI.


Ravi Ratnasabapathy is a Fellow of the Advocata Institute.