State Owned Enterprises

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

Sri Lankan Airlines - The third largest loss making state enterprise

The Sunday Leader quotes Advocata Institute's report on State of State Enterprises:

The learnings from the previous Strategic Planning Exercise of SriLankan Airlines is particularly relevant at present, considering that the airline was the country’s third-largest loss-making State-Owned Enterprise (SOE) from 2006 to 2015 (according to Advocata Institute’s report – The State of State Enterprises in Sri Lanka).

These losses accounted for over a fifth of the total losses of the country’s SOEs (categorized as strategically important by the treasury) from 2006 to 2015, based on the Advocata report.

More on the Sunday Leader

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.  

 

soe 3.JPG
soe 4.JPG
soe 5.JPG


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