When the State does business, the taxpayer gets the bill

By Dhananath Fernando

Originally appeared on The Morning

The Ministry of Finance Annual Report for 2025 is now out. One chapter every Sri Lankan should read carefully is the section on State-Owned Enterprises (SOEs), the businesses owned by the Government.

The story is simple. Even in a year where Sri Lanka showed strong fiscal discipline, SOE performance weakened. Profits declined. Several institutions made losses. The return to the Treasury was small. The taxpayer continued to carry the burden.

The President himself recently said that some of these entities may have to be closed down, and that even closing them will cost money. That is the problem with SOEs. They are easy to start, difficult to reform, expensive to maintain, and politically painful to close.

According to the Annual Report, the 51 key SOEs made a profit of Rs. 444.4 billion in 2025. At first glance, that looks impressive. But in 2024, the same group made Rs. 539.1 billion. Profits have fallen by more than 17%. In fact, the 2025 profit is slightly lower than the Rs. 445 billion recorded in 2023.

Sri Lanka has more than 500 State-owned and State-controlled entities, but detailed reporting is usually available only for the main 51. So even the picture we see is not the full picture.

The real story

Many people may still say: “What is the problem? They are making profits.”

But profit alone does not tell the story. We must look at the assets used to generate that profit. The total asset base of these 51 SOEs is about Rs. 16.5 trillion. That is roughly half of Sri Lanka’s GDP. From this massive asset base, the total profit was only Rs. 444.4 billion. That means the return on assets is about 2.7%.

To put it simply, imagine you own a shop worth Rs. 1 million. If that shop gives you only around Rs. 27,000 a year, or about Rs. 2,250 a month, would you call it a good investment? Even an ordinary fixed deposit may give a better return. So while it is easy to declare that they are profitable, it is much harder to say they are good businesses.

Where did most of this profit come from? Banking and finance.

Out of the Rs. 444.4 billion in total SOE profit, about Rs. 304.8 billion came from banking and finance institutions such as the Bank of Ceylon, People’s Bank, the National Savings Bank, and the Employees’ Trust Fund. The Bank of Ceylon alone reported a profit of about Rs. 120 billion, roughly 27% of the total profit of all 51 key SOEs.

But whose money is in these institutions? Largely our own money deposits, savings, retirement funds, and State-linked financial power. A large part of SOE profit does not come from competitive business success. It comes from State banking power, regulatory advantages, monopoly positions, and public funds.

This pattern is visible across many SOEs. The profitable ones are often monopolies or protected businesses. The Sri Lanka Ports Authority, National Water Supply and Drainage Board, and National Lotteries Board are not ordinary businesses competing in an open market.

It is like passing a law saying only I can sell bread in the country and then proudly declaring that my bakery is profitable. Is that business excellence, or monopoly privilege?

Now look at the loss-making side. The biggest hit in 2025 came from the Ceylon Electricity Board (CEB). The CEB recorded a loss of Rs. 38.7 billion. In 2024, it made a profit of Rs. 141.6 billion. In one year, it moved from a large profit to a large loss.

The CEB is also a monopoly. In 2024, high electricity tariffs helped it show a profit. In 2025, with tariff reductions, cost problems, and operational inefficiencies, it returned to losses. According to reported data, the average sales price per unit fell from Rs. 36.01 to Rs. 26.24, while the cost per unit was Rs. 30.23. When electricity is sold below cost, the final bill does not disappear. It comes to the taxpayer.

There is another lesson here. When the State operates in areas where there is competition, it often struggles. Construction-sector SOEs recorded losses. SriLankan Airlines, Lanka Sugar, the State Plantations Corporation, and the Sri Lanka Rupavahini Corporation also remained loss-making.

The message is simple. Give a monopoly and the SOE may show a profit. Put it in competition and it often struggles. Then the problem is not only management. It is ownership, incentives, and structure.

The real cost

The most important question is this: how much of this so-called profit actually came to the Treasury?

The answer is very little.

The total levies and dividends paid by SOEs to the Consolidated Fund in 2025 amounted to Rs. 56.5 billion. In the same year, the Government provided about Rs. 103 billion in budgetary support to SOEs. In simple terms, SOEs gave the Treasury Rs. 56.5 billion, but received about Rs. 103 billion from the Budget.

The total losses of loss-making institutions amounted to about Rs. 69.8 billion. When we consider the budgetary support of about Rs. 103 billion, and deduct the Rs. 56.5 billion received as dividends and levies, the net burden on the taxpayer is still around Rs. 117 billion.

That is the real cost of SOEs.

Rs. 117 billion is not just a number in an Excel sheet. It is money that could have gone to the poor through Aswesuma. It is money that could have gone to hospitals, medicine, schools, courts, policing, and basic public services. Every rupee used to keep a failing State business alive is a rupee not spent on a poor family.

Many people believe that if honest people are appointed to these institutions, the problem will be solved. Honesty is important. Competence is important. Good boards are important. But they are not enough. The problem is structural.

The State already has a share in every profitable business through corporate tax. With Value-Added Tax and other taxes, the Government receives even more. Therefore, the Government does not need to run businesses to earn revenue. It can earn revenue by creating the conditions for businesses to grow.

The proper role of the State is not to sell sugar, fly planes, grow tea, sell fish, run lotteries, manage hotels, sell cashew, or operate construction companies.

The role of the State is to maintain law and order; protect national security; provide a targeted safety net for the poor; improve education and healthcare; fix the courts, Police, and regulatory system; and create fair competition.

When the Government tries to do everything, it ends up doing the most important things badly.

That is why SOE reform is not only about profit and loss. It is about priorities. It is about whether the State should use scarce public money to protect poor families or to protect failed businesses.

The 2025 data tells us something clearly. Even after an economic crisis, even under fiscal discipline, and even with better political intentions, the SOE problem has not gone away.

The taxpayer is still paying the bill.

From airlines to electricity: The cost of ignoring markets

By Dhananath Fernando

Originally appeared on The Morning

Last week offered two clear reminders of a lesson Sri Lanka keeps learning the hard way.

Markets discipline decisions. Governments struggle to run businesses. The cost of ignoring this distinction is paid by taxpayers and consumers.

SriLankan: A repeating cycle

The first story was the resignation of the Chairman and several board members of SriLankan Airlines. This is not a story about individuals failing. It is a story about systems failing. Even capable professionals cannot succeed when incentives, governance, and political pressures are misaligned.

We have seen this cycle before. Successive governments have been persuaded that the airline can be ‘turned around’ with the right people and a new plan.

When the current President assumed office as both President and Finance Minister, his first Budget allocated Rs. 20 billion to support the airline based on the board’s recovery plan. Eighteen months later, we have not even managed to appoint a permanent CEO to run a highly technical, fast-moving industry that depends on precision and commercial agility.

This is not new. As far back as the time of J.R. Jayewardene, advice from Lee Kuan Yew was clear: do not run an airline as a state enterprise. Singapore structured its National Carrier under Temasek Holdings, separating ownership from political control and embedding commercial discipline.

Sri Lanka has done the opposite. From one administration to another, the pattern has been the same. Political ownership, weak governance, and repeated capital injections. The debt of roughly $ 510 million was absorbed by the Government, transferring the burden from the airline’s balance sheet to the public. Yet the core problem remains unresolved.

Every new board arrives with a familiar script. Fleet expansion. Optimistic projections. A promise that the airline is ‘rescuable’. But without basic building blocks such as professional management and independence from political interference, these plans collapse. If a government cannot appoint a CEO for its own airline, it raises a more fundamental question. Can the State effectively run any commercial enterprise?

Today, there is discussion of injecting another Rs. 20 billion as the airline struggles to remain a going concern. This is the trap of State ownership. Entering is easy. Exiting is nearly impossible. Selling is politically sensitive. Closing is economically disruptive. The result is a perpetual drain on public finances.

Energy pricing: The real risk

The second story was the electricity tariff revision. It is understandably unpopular, but the real risk lies not in raising prices but in failing to do so.

Energy pricing in Sri Lanka has long been disconnected from market realities. When global prices rise and domestic tariffs remain unchanged, the losses accumulate within institutions such as the Ceylon Petroleum Corporation. These losses do not disappear. They are financed through borrowing, money printing, or delayed payments, all of which eventually return to the public in the form of inflation, currency depreciation, or shortages.

At present, diesel pricing illustrates the problem clearly. Based on current global prices, diesel is being sold at a significant loss, estimated at around Rs. 163 per litre. Even if the Government were to remove the entire tax component, there would still be a gap. This is not sustainable.

Meanwhile, private players such as Lanka IOC and Sinopec are operating under the same administered pricing structure. The sharp increase in super diesel prices to around Rs. 600 signals that underlying costs are much higher than the retail price of standard diesel.

At the refinery level, the difference between diesel and super diesel is relatively small, often in the range of $ 0.05–0.15 per litre. In rupee terms, this would typically translate to a gap of around Rs. 45–50. The current price difference of nearly Rs. 190 suggests that standard diesel prices are significantly underpriced.

Underpricing has consequences. It creates implicit subsidies that are neither targeted nor efficient. In Sri Lanka, around 70% of fuel is consumed by the wealthiest 30% of the population. When diesel is sold below cost, the benefit disproportionately accrues to those who consume more, while the cost is borne by the broader population.

This is why the real conversation should shift. While prices must be adjusted to reflect market realities, the policy effort should focus on strengthening the social safety net. The objective is not to suppress prices artificially, but to protect the most vulnerable directly.

We cannot protect the poorest of the poor by keeping prices low. In fact, rising food prices, especially of essentials like rice, have already hit them the hardest. Broad subsidies on fuel do little to help them. Instead, they drain public resources.

The better approach is targeted support. Increase cash transfers to the poorest households so they can weather this period of high prices. Strengthen the social registry. Improve targeting. Ensure that assistance reaches those who genuinely need it, rather than being spread thinly across the entire population.

This also preserves fiscal space. Instead of subsidising consumption for higher-income groups, resources can be redirected to those who are most vulnerable. It is both economically efficient and socially just.

The link to electricity is direct. As water levels decline and hydro generation falls, the system shifts towards thermal power, relying on diesel and coal. If diesel prices remain artificially low, the losses in the energy sector widen. If prices are corrected, electricity tariffs must adjust accordingly. The alternative is power cuts or a return to the fiscal and monetary instability that triggered the last crisis.

The uncomfortable truth is that market-reflective pricing is not a choice. It is mandatory. Ignoring it does not protect consumers. It postpones the cost and amplifies it.

The high price of ignored signals

Both stories from last week point in the same direction. Governments are not designed to run commercial enterprises. When they try, inefficiencies and losses accumulate. Prices that ignore market signals create distortions, shortages, and fiscal pressure.

The solution is not complicated, though it is politically difficult. Exit from commercial activities where the State has repeatedly failed. Establish clear, rules-based pricing mechanisms for energy that reflect global costs. At the same time, build a stronger, better targeted social safety net that protects the poorest from the impact of these adjustments.

Markets are not perfect. But they are far better at signalling reality than administrative decisions. When those signals are ignored, reality eventually asserts itself, often at a much higher cost.

(The writer is the Chief Executive Officer of Advocata Institute. He can be contacted via dhananath@advocata.org)

(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)