SOEs

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.”

Download full report: https://www.advocata.org/state-enterprise-srilanka

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.”

Download full report: https://www.advocata.org/state-enterprise-srilanka

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.

Download full report: https://www.advocata.org/state-enterprise-srilanka

Media coverage on Asia Liberty Forum 2019

The Advocata Institute co-hosted Atlas Network’s Asia Liberty Forum earlier this month from the 28th of February - 01st of March at the Hilton Colombo. The event was graced by 250+ academics, intellectual and leading economic and policy thinkers from over 30 countries. The Freedom Dinner on the 28th of February saw the presence of leading political dignitaries as well. The forum focused on economic challenges facing the Asian region and way forward.

Sunday Observer - Advocata Institute to host Asia Liberty Forum

“Over 200 leading academics, policymakers and intellectuals from over 30 countries will participate in the Asia Liberty Forum 2019 in Colombo to discuss challenges facing the Asian region and to learn from each other on how to advance free-market reforms. The Asia Liberty Forum is an annual event by the United States based Atlas Network, co-hosted in partnership with the Advocata Institute.”

Read full article

Lanka Business Online - Advocata Institute to host Asia Liberty Forum 2019 in Sri Lanka

“Over 200 participants, comprising leading academics, policy makers and intellectuals from over 30 countries will come together in Colombo, Sri Lanka for the 2019 Asia Liberty Forum to discuss challenges facing the Asian region and to learn from each other on how to most effectively advance free-market reforms.”

Read full article

Daily News - Asia Liberty Forum co-hosted by Advocata Institute, Atlas Network today

“The Asia Liberty Forum brings together over 50 speakers, over 275 thought leaders and intellectuals from 40 different countries to discuss challenges facing the region and to learn from one another how to effectively advance market-oriented reforms. The annual Asia Liberty Forum is hosted by the Atlas Network and co-hosted by Advocata Institute in Sri Lanka this year.”

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Daily FT - Public events at Asia Liberty Forum announced

“The annual Asia Liberty Forum is hosted by the Atlas Network and co-hosted by Advocata Institute in Sri Lanka this year. With the objective of making this year’s forum affordable and accessible to all, Advocata Institute is opening up two sessions to the public, with free admission.”

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Business World - Capitalism and freedom in Asia

“The annual Asia Liberty Forum (ALF) 2019 conference is held this week February 28 to March 1 in this South Asian country. To discuss and promote capitalism and free market policies may look ironic in a country that is officially named “Democratic Socialist Republic of Sri Lanka.” Yet this country has more pro-market policies than many supposedly capitalist Asian economies.”

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Sunday Observer - Expert advocates economic reforms for five years

“Sri Lanka needs to implement much needed economic reforms at least for the next five years, particularly to address the debt burden. It is the responsibility of governments to place the economy on a sound footing to revive growth and to accrue benefits to the people, Executive Director, Lakshman Kadirgamar Institute of International Relations and Strategic Studies, Dr. Ganeshan Wignaraja told the first ever Asia Liberty Forum in Colombo last week.”

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Daily FT - Recipe for SOE reform

“Speaking at the launch of the ‘State of State Owned Enterprises 2019’ report compiled by local think-tank Advocata, Resident Fellow Ravi Ratnasabapathy recapped the significant role played by SOEs in the Sri Lankan economy. He pointed out they were vulnerable to mismanagement and corruption because of potential conflicts between the ownership and policy-making functions of the Government and undue political influence on their policies, appointments, and business practices.”

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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: https://goo.gl/XogBvY

Perverse incentives and a lack of accountability lead to rampant corruption in State

A new report by The Advocata Institute, titled “The State of State Enterprises in Sri Lanka: Systemic Misgovernance” identifies the systemic issues that plague state-owned enterprises (SOEs) leading to substantial losses. This flagship publication builds on the analysis and data from the first ‘State of State-Owned Enterprises’ report which was released in 2016.

The essays in the report attempt to analyse the causes for the structural weaknesses and propose simple recommendations to establish basic central government control over SOEs and improve accountability.

Figure 1

Figure 1

The report identifies the lack of an official government definition of state-owned enterprises as a point from which many systemic issues arise. The lack of a definition means that the government does not have an authoritative list of all SOEs. To fill this information gap, the Advocata Institute has compiled a list of all known state enterprises, their subsidiaries and their subsidiaries.

Figure 1 provides a quick overview of the data, emphasizing the excessive number of state enterprises.

The structural problems of state-owned enterprises emerge from the problem of multiple actors (bureaucrats, politicians and citizens) with conflicting interests. This makes state owned enterprises vulnerable to mismanagement and corruption because of potential conflicts between the ownership and policy-making functions of the government, and undue political influence on their policies, appointments, and business practices.

The report finds that internal control, monitoring and governance frameworks appear inadequate to deal with these problems – of the 527 entities regular information is only available for 55. Even obtaining a complete list of entities proved to be a challenge. Financials are routinely late and only a minority obtain ‘clean’ audit reports. In 2017, the total losses incurred amounted to LKR 87.78Bn. To put this value in context, the government budget allocated LKR 44Bn for Samurdhi payments in the same year.

Extracts from reports of COPE and the Auditor General which are included in Advocata’s report highlight repeated instances of fraud, mismanagement, corruption and negligence. The issues no longer appear to be isolated incidents of opportunistic behavior by individuals or occasional lapses in control but point to deeper, structural weaknesses. While internal control and accountability mechanisms are important in checking abuses, they are insufficient in themselves.

The report elaborates on how a trend for SOEs to be incorporated as limited liability companies allows politicians to bypass treasury or budget restrictions and evade parliamentary accountability. Complex corporate structures provide a convenient shroud for abuse. A review of the reports of the Auditor General and the Committee on Public Enterprises paints a dismal picture of systemic failures of governance leading to gross misappropriation of public funds.

The reports concludes with three main recommendations:

  1. Compiling a comprehensive list of all SOEs and setting basic reporting procedures

  2. Strengthening COPE and COPA

  3. Implementing the OECD Principles of Corporate Governance

“A lack of accountability is leading to flagrant abuse within SOE's. The Finance Ministry must act urgently to prevent it spiraling out of control” says Ravi Ratnasabapathy, Resident Fellow of Advocata and co-author of the “State of State Enterprises in Sri Lanka” report.

The immediate antidote to corruption is increasing and improving transparency and accountability. The ideal reform of the recommended three to address the problems that plague are SOEs is to introduce and enforce the OECD Guidelines on Corporate Governance.


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

Advocata Report on SOEs makes an impact at Chamber event

Photo Courtesy  Kithmina Hewage   

Photo Courtesy Kithmina Hewage 

From Dailymirror.lk:

According to the minister, a top corporate sector CEO has also been appointed to lead the Public Enterprise Board but fell short of disclosing who the official was. The minister said he was in the audience leaving the participants to guess.

According to Advocata, an independent policy think tank, 55 strategically important SoEs in Sri Lanka have made a cumulative loss of Rs.636 billion during 2006 and 2015.  The cumulative profit of the profitable SoEs during the same period has been Rs.530 billion, excluding the Employees’ Trust Fund.  The statement by the minister suggests that the government is ready to go the whole hog in privatizing both the strategic as well as non-strategic SoEs despite the immense political risk forthcoming.  Speaking at the final session under the theme titled, ‘The Future of Public Enterprises’ Samarawickrama said the government had reached the final leg of entering into a public-private partnership (PPP) to restructure the loss-making national carrier, SriLankan Airlines but did not disclose the party involved.

Meanwhile, Chief Opposition Whip and Janatha Vimukthi Peramuna Leader Anura Kumara Dissanayake said if the government could take over the liabilities of SriLankan Airlines prior to the sale of the carrier to a private party, they should also be able to take over the assets and run the airline. 

From EconomyNext.com

SOEs were used to give off-budget subsidies and they borrowed from banks, pushing up interest rates and depriving funds and raising the borrowing costs of small enterprises.

Although some SOEs made profits, they do not reflect the returns for the investments made. Anushka Wijesinghe, Chief Economist at the Ceylon Chamber of Commerce, said that a report by Advocata, an independent think tank, found that from 2006 to 2015 it cost taxpayers Rs640 billion.  

A part of the losses made by SOEs were financed by the budget. 

"That means the government has to find tax revenues. Or else, the government has to borrow the money domestically or from abroad. 

"These debts also have to be repaid by the people through future taxes. One way or the other the people have to bear the financial cost of these losses."

Advocata Institute's Report on SOEs is available in our research section.

Privatization & Public Private Partnerships Of SOEs In Sri Lanka

Arundathie Abeysinghe writes on Colombo Telegraph on SOEs In Sri Lanka,

In many Asian countries including Sri Lanka State-owned Enterprises (SOE) continue to control vast swaths of national Gross Domestic Product (GDP) with the state as their biggest share holder. As such, they control about 1/3 of total enterprise assets and SOEs are larger than their non-SOE peers. There is a great variety among Sri Lankan SOEs. Meanwhile, SOEs in the sectors that are monopolized by the state yield good income and profitability, while those that are not supported by the state record poor performance. To better understand the profitability of Sri Lankan SOEs, a deeper analysis should be done by looking into individual sectors.

Shares of SOEs in different sectors are diverse. The majority of SOE profits are contributed by sectors that are monopolized by them, whereas, sectors which are dominated by non-SOEs are major sources of non-SOE profits. The majority of the SOE profits are contributed by state-monopolized sectors and such SOEs record a respectable rate of return.  At the same time, profitability of SOEs in sectors with less state domination is much poorer.

According to the Treasury Annual Report 2014, at present Sri Lanka possesses 245 State Owned Enterprises (SOEs), of which 55 have been identified by the General Treasury as strategically important SOBEs under the clusters of Banking and Finance, Insurance, Energy, Ports, Water, Aviation, Commuter Transport, Construction, Livestock, Plantation, Non Renewable Resources, Lotteries, Marketing & Distribution, Health and Media.

Read The entire article on Colombo Telegraph

Privatisation popular according to an online Poll

An online poll conducted by roar.lk amongst it’s readers indicates, that privatisation remains a popular option with an overwhelming majority saying that Sri Lanka cannot move forward without at least some form of privatisation.


Readers of the website however tend to be from the more urbane, english-speaking part of the population and unlikely to be representative of the country in general.  

 

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During the panel discussion at our event on State Enterprise reform in Sri Lanka,  panelists discussed the reasons for why the general public seems somewhat against privatisation.  

 

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