Reforming State Owned Enterprises

Ability of Parliamentary Committees questionable – Advocata

Republic Next mentioned Advocata in a recent article on misgovernance of SOEs in Sri Lanka.

The Advocata Institute, a Colombo-based think tank, is questioning the ability of various oversight committees set up by Parliament to look into governance issues in Sri Lanka.

The report, which looks at the State Owned Enterprises (SOEs), is highly critical of these institutions that are draining the Treasury of billions of rupees each year.

Advocata says the way Members of Parliament are elected is an issue. MPs align with wealthy election backers who provide campaign support in return for political protection or rewards. Thus, those elected are politicians with “access to cash and manpower – not intellect or ability.”

Although politicians will pursue their own interests, an effective governance system should apply the brakes on the worst of those impulses. Parliament, through the aforementioned committees, should be doing this, but is seriously underperforming, the report says.

Although Parliamentary Committees such as the Committee on Public Enterprise (COPE) and the Committee on Public Accounts (COPA) conducted investigations that shed light on important issues – including the much talked about Bonds Scam – Advocata says these committees could do more to scrutinise public funds. These committees do not appear to have sufficient expertise to make concrete recommendations to right the wrongs in Government.

The report notes that “serious deficiencies exist.” With the current political uncertainty, it says that “engineering crossovers in return for political office reduces parliament to a rubber stamp and the committee system is weak.” The report commends the current government for the major overhaul of the committee structure, which it says makes them “much better geared to scrutiny and accountability.”

Structures aside, the report says that the performance of these committees depends on the calibre of the MPs.

Advocata recommends that experts who are not MPs be added to these committees so that they could function better. “Unfortunately, it does not seem as if we have the necessary quality of MPs in sufficient numbers to make the reformed system perform. Aside from capacity, there is little incentive for MPs to take committee work or parliament seriously. Many don’t even attend,” it says. Publicly available information shows that less than half the MPs attended at least 75% of the sessions. Even those who attended remained in the house only for the first hour.

Advocata also found that “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 respond to the recommendations of these committees within any stipulated period of time, leaving the accountability loop open.” Advocata also adds its voice to the clamour to make the COPA and COPE hearings open to the media.

The picture that emerges from the Advocata report is bleak. It concludes that the “political process incentivises corruption. A weak governance regime means there is 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.”

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Corruption and patronage culture rampant

Republic Next mentioned Advocata in a recent article on misgovernance of SOEs in Sri Lanka.

State Owned Enterprises (SOEs), which have cost the state mammoth amounts of state funds over the past few decades, are victims of a patronage culture fostered by corrupt politicians, says a new report on the state of these organisations released by Colombo-based think tank Advocata.

The report quotes Finance Ministry Secretary Dr R.H.S. Samaratunga as saying that successive Sri Lankan governments have pumped a colossal Rs.1, 150 billion into the upkeep of these SOEs up to 2017.

This is money that could have been spent on developing schools and hospitals as well as maintaining much-needed infrastructure.

The report says that lifting limits on political campaign spending and abolishing transparency of those money trails in 1978 opened the floodgates of corruption.

The report points out that “wealthy backers, some connected to the underworld, provide labour and fund campaigns in return for political protection or rewards.” Because of this culture, the people who end up getting elected to office are those with “access to cash and manpower – not intellect or ability.”

Naturally, this means that the state’s technical capacity to formulate policy and implement them are insufficient. The report notes that “the concept of independent policy analysis does not exist, leaving a vacuum vulnerable to capture by special interest groups.”

After the Member is elected, they try to recover their “investment” in the political venture or start building up a war chest to be re-elected. He or she also has to provide jobs and wherewithal to their supporters and for this, SOEs provide opportunities for the politicians to stuff these enterprises with staff that exceed requirements. In one egregious incident, the State Engineering Corporation recruited a mind-blowing 451 persons to fill 41 vacancies in December 2015. That is more than ten times the required number of persons, according to inquiries conducted by Parliament’s Committee on Public Enterprise (COPE).

The reason why the SOEs are a soft target for the corrupt is weak governance practices, the Advocata report says.

The report suggests that adopting “comprehensive corporate governance practices is a route that many countries have taken to strengthen the accountability of SOEs. These governance practices strengthen the governing bodies that oversee and control (shareholders or owner meetings, board and management, internal monitoring structures), define clear rules of engagement between the different actors, and increase transparency and accountability towards the stakeholders.”

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Ignorance and corruption bedevils state enterprises

Republic Next mentioned Advocata in a recent article on misgovernance of SOEs in Sri Lanka.

The Sri Lankan state does not know how many enterprises it runs, reveals a report on State Owned Enterprises (SOEs) released by the Colombo-based think tank Advocata.

Titled “Sri Lanka’s state-owned enterprises Systemic Misgovernance: A discussion”, the report delves into the state of these organisations and proposes policy reforms to improve governance.

In the foreword, the researchers point out that a “major roadblock identified in the report is the lack of an official, all-encompassing list of SOEs, their subsidiaries and sub-subsidiaries. The Advocata Institute has found references to over 400 SOEs, but this cannot be verified against any government source.” The Department of Public Enterprise has the most comprehensive list, consisting only 127 SOEs. Some 50 of these SOEs are considered “strategic” and are closely monitored by the Treasury.

The report also found that enumerating SOEs was problematic and says “this problem is compounded by the fact that the government has a very loose definition of SOEs. To address the problem, this report provides a working definition of what an SOE is, for the sake of clarity.”

The report goes on to explore the structural issues at the core of Sri Lankan SOEs. Elaborating on these issues, the report illustrates how structural issues lead to poor governance, which allows SOEs to continue to function as loss-making entities.

The report points out that unlike private enterprises, SOEs are run with taxpayer money and when they incur losses, the Government – or in effect the taxpayer – has to pay for it. Because of this, SOEs are a drain on the Treasury.

Mismanagement and outright looting bedevils these enterprises as they are crammed with workers who are supporters of politicians and not staffed with professionals who could make them efficient and profitable, the report finds.

“SOEs are ultimately owned by citizens but run by managers who are controlled by politicians. Politicians determine or otherwise influence the appointment of key management and must hold the managers accountable”, the report adds.

The report compares SOEs to private sector companies, where shareholders have invested their own money in a venture. “Unlike shareholders, the politicians have not invested their money in the business. As they have no stake, there is no particular interest in ensuring it is well run. However, politicians do have incentives to direct SOEs to achieve economically inefficient objectives for political purposes, giving rise to political costs. These may be benign if policies enhance social welfare at the cost of shareholder value. However, more often than not, they are malign and favour political allies at the expense of public welfare”, it points out.

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What is the state of Sri Lanka's state enterprises?

Sri Lanka has a total of 527 State Owned Enterprises out of which regular information is only available for 55. These SOE's accumulate billions of losses annually due to sheer mismanagement. The precedence of corruption in the highly bureaucratic systems that govern SOEs are also a case for alarm. What is the state of our state owned enterprises?

At this year's Asia Liberty Forum, 2019, we are explored this topic in a discussion and public talk by Ravi Ratnasabapathy, Suresh Shah, Thilan Wijesinghe and Dr. Malathy Knight; moderated by Dr. Nishan de Mel.

Report out now: