Advocata Institute Commends Cabinet Decision to Close 33 Non-Operational SOEs and Calls for Divestiture as the Next Step

Originally appeared in the Daily Mirror

The Advocata Institute welcomes the decision by the Cabinet of Ministers, on the proposal of President Anura Kumara Dissanayake in his capacity as Minister of Finance, Economic Stabilization and National Policy, to formally close 33 non-operational State-Owned Enterprises (SOEs) under Phase 2 of the government’s state-sector reform program.

The move, to be implemented through a Special Liquidation Unit under the Ministry of Finance, is a first step toward eliminating waste, improving fiscal discipline, and redirecting scarce resources to more productive sectors of the economy.

Sri Lanka’s SOEs, numbering over 400 across 33 sectors and employing nearly 250,000 people, account for around 4.5% of the country’s total public debt (guaranteed debt by treasury). Of these, around 130 have commercial interests, while the remainder are statutory or non-commercial entities. This press release focuses exclusively on the commercial SOEs plagued by weak management, political interference and a lack of transparency. The IMF has identified SOEs as a core governance and fiscal risk.

Shutting down entities such as Mihin Lanka (Pvt) Ltd, Lanka Cement PLC, Selendiva Investments Ltd, and Magampura Ports Management Company (Pvt) Ltd provides a premise for the government to pursue a broader rationale for SOE reform: addressing economic failures, supporting development, and safeguarding national interests. State ownership is warranted only where there is a clear economic or strategic justification—typically when market failures prevent private actors from efficiently providing goods or services. The number of entities retained as SOEs should therefore be significantly reduced, focusing solely on those that are strategically important or justified by clear economic, strategic, or development objectives.

Ensuring Competitive Neutrality

While closures are essential, reform must also correct distortions due to a lack of competitive neutrality— the principle that all firms should compete on equal terms. SOEs that still hold significant positions in their markets, often enjoy state guarantees, preferential finance, or regulatory exemptions unavailable to private competitors. These privileges distort markets, crowd out private investment, weaken productivity growth and reduce efficiency across the economy. Addressing these horizontal effects is critical. Competitive neutrality means that all enterprises, public or private, compete on the same terms, without hidden subsidies or privileges.To restore a fair playing field, SOEs must operate without hidden advantages, face hard budget constraints, and earn at least their cost of capital. Separating commercial from non-commercial activities and transparently compensating public service obligations are also essential to prevent cross-subsidisation.

Impacts on Downstream and Upstream Industries

SOEs create ripple effects across industries. When a dominant SOE underperforms, downstream firms and households face higher costs and risks, while upstream suppliers are squeezed by monopsonistic purchasing. The Ceylon Electricity Board (CEB), which holds a monopoly over electricity transmission and distribution, illustrates this clearly. Any dysfunction in the CEB, from financial losses and tariff distortions to underinvestment and service disruptions, cascades directly to downstream sectors such as manufacturing, services, and households. Loss-making entities like the CEB generate economy-wide costs by undermining competitiveness, constraining private sector growth, and creating significant fiscal risks.

Addressing Governance Failures

Sri Lanka’s SOEs face entrenched governance weaknesses. Boards are politicised, frequently reshuffled after elections, and lack the independence to enforce accountability or drive efficiency. Oversight is fragmented, performance rarely measured against the cost of capital, and mounting SOE debt continues to add to Sri Lanka’s already unsustainable public debt (over 100% of GDP). Advocata commends the proposal to bring SOEs under a central holding company owned by the Treasury, under the purview of the Ministry of Finance.Used successfully in Singapore and Malaysia, this model breaks capture by line ministries and reduces political misuse, enabling professional oversight, merit-based board appointments, consolidated reporting, and a focus on shareholder returns.

Addressing Unsellable and Legacy Entities

While the closure of 33 dormant SOEs is a step in the right direction, it is more important that the Government addresses entities that are not dormant but are difficult to sell due to the dire state of their finances. Two examples are the Janatha Estates Development Board (JEDB) and Sri Lanka State Plantation Corporation (SLSPC) which have long ceased to operate as viable commercial entities. These entities hold significant land and asset portfolios, but their operational model is unsustainable and does not deliver economic value. There are many others that fall into this category. The rational course is to wind them down and repurpose their assets through a transparent process, directing the proceeds toward reducing public debt and thereby directly easing the fiscal burden on taxpayers.

Beyond Closures: The Case for Divestiture

While the closure of non-operational SOEs is an important milestone, the Advocata Institute stresses that this should be viewed as a headstart towards full or partial divestiture of commercially viable enterprises. Research shows that divestiture:

Reduces fiscal pressure: Publicly guaranteed SOE debt accounts for 4.5% of Sri Lanka’s total debt. Divestiture relieves the Treasury from absorbing massive losses.

● Unlocks efficiency and productivity: Private ownership injects market discipline. Managers and employees are recruited and rewarded on merit, not political loyalty.

● Cuts corruption and patronage: SOEs often act as vehicles for jobs, contracts, and political kickbacks. Divestiture breaks this nexus, reducing opportunities for corruption.

● Mobilises investment: Private capital can modernise enterprises, upgrade technology, and expand capacity ,opportunities the state cannot afford to finance.

Divestiture is often seen as selling the “family silver,” but in reality, it is about liberating underutilized resources, whether land, capital, or labor—so they can operate at their full potential. When these assets remain in state ownership, they often underperform. Divestiture allows the government to continue benefiting as a stakeholder through the tax system, while competitive markets enable these entities to operate efficiently, generate higher profits, and create a large consumer surplus. It also provides an opportunity for a continuous stream of income through taxes and allows resources to be recycled for budgetary support or investment in greenfield infrastructure, where the government is best placed to intervene.

Beyond economic gains, divestiture is a governance imperative. It unlocks efficiency, attracts investment, curbs corruption, and ensures market discipline by creating a level playing field with the private sector. By limiting the state’s commercial footprint, it reduces waste and allows the government to focus resources on critical priorities such as infrastructure, education, and other investments that drive growth and sustainable development.

The Cato Podcast mentions Advocata in their podcast on 'The Outside Dilemma' with Matt Warner

The Cato Podcast hosted by Caleb Brown mentioned Advocata in a their recent podcast on Development Economics and ‘The Outsider’s Dilemma’ with Matt Warner, President of the Atlas Network.

Media mention on Reuters of Advocata on taxes on sanitary napkins

Thomson-Reuters Foundation mentioned Advocata in a recent article on period poverty and sanitary napkin affordability, published on April 04, 2019.

An excerpt from the article:

“Should a country tax women on something they have no control over? As the world celebrates International Women’s Day, in Sri Lanka women’s health as well as education is in jeopardy due to high taxes on women’s sanitary products, say activists.

“Period poverty has hit global headlines in recent years, with statistics showing that even in a wealthy Western country like Britain, one in 10 girls have been unable to afford sanitary products. …In Sri Lanka, the problem is particularly acute because sanitary products are so heavily taxed - until last September, the levy on imported pads was more than 100 percent. It has since been reduced to about 63 percent and Sri Lanka’s finance minister, Mangala Samaraweera, told the Thomson Reuters Foundation he was looking into how taxes on sanitary products could be reduced further.

But Anuki Premachandra, head of research communication at The Advocata Institute, an independent policy think tank, said the issue still wasn’t being given the importance it deserved. “People are enraged about the cost of carrots, but when it comes to taxes on sanitary napkins, they dismiss it as a women’s issue,” she said.”

Media mention of Advocata on taxes on sanitary napkins for IWD 2019

Sunday Observer mentioned Advocata in a recent article on sanitary napkin taxation for International Women’s Day, 2019.

An excerpt from the article:

“Should a country tax women on something they have no control over? As the world celebrates International Women’s Day, in Sri Lanka women’s health as well as education is in jeopardy due to high taxes on women’s sanitary products, say activists.

“In a country with 4.2 million menstruating women and a population that is 52 per cent women, you’ would think wewould know better than to tax a woman on something that is beyond her control; but we do not’’ said Anuki Premachandra of the Advocata Institute. Anuki who serves as the Manager-Research Communication at Advocata had been canvassing on the sanitary pad problem during the past couple of months.

“Import taxes on sanitary napkins in Sri Lanka are as high as 62 per cent and what our policy makers fail to realise is that this is a tax on a woman’s biological process that she has no control over. Are we still a society that fails to provide a woman access to a basic necessity? Is it not time we said times up Sri Lanka?” said Anuki.”

Media mention of Advocata regarding taxes on sanitary napkins

The Morning mentioned Advocata in a recent article on sanitary napkin taxation.

An excerpt from the article:

“The Advocata Institute, which originally published the article, is an independent policy think tank based in Colombo. We spoke with the institute’s Manager Research Communications Anuki Premachandra with regards to the data revealed by them.

A comprehensive understanding of the nature of our current situation can be obtained if you look at the following price comparisons: The average price of a packet of 10 pads in Sri Lanka is Rs. 130. Imported pads are priced between Rs. 200-260, and locally-produced pads are also around Rs. 100-130. A cost of a single pad in Sri Lanka is 24% more than in US and 26% more than the retail price of a sanitary napkin in India.

Protectionist taxes ensure security for local producers while also allowing a greater selection of options for the consumer; this has inadvertently resulted in local producers enjoying the comfort of a large profit margin per packet as prices in the market are high in itself, owing to taxes.”

Ailing rupee and Price Controls may lead to a shortage of Milk Powder

A cup of tea is every Sri Lankan’s morning mantra. This might not be the case much longer as Sri Lanka may face a shortage of milk powder as several leading milk powder importers are reported to have taken a collective decision to suspend imports. The recent depreciation of the rupee has caused a significant increase in import costs and importers say they are now unable to sell at the controlled price, hence the decision to suspend imports. The same impact will be felt in other industries subject to price controls. The pharmaceutical industry withdrew eleven drugs from the market citing similar reasons.  

The currency has depreciated by 10% in the past two months and over 20% in the past year, which will raise landed costs of  import products significantly. Importers of goods subject to price controls will continue to be squeezed as their price margins reduce and this will eventually lead to a halt in imports, like in the evident case of milk powder.

Imported milk powder is taxed at a total of 45% in Sri Lanka, with the objective of protecting local farmers and achieving self-sufficiency in milk products. Despite this self-sufficiency goal, local production meets below 40% of the total domestic milk requirement, considerably below 80% levels in the 1970s. Therefore, majority of the demand in milk products is met through imports, mostly from New Zealand and Australia. Over the last decade, in 7 out of 10 years, imports of milk powder has grown at a higher pace than the growth in local production.

Additionally, in May 2018, changes to existing Price Controls on Milk Prices have raised the controlled price for milk powder to Rs. 345/400g pack and Rs. 860/1kg pack. This price control was enforced by the Consumer Affairs Authority, despite a rise in the global prices of milk. Global milk powder prices fell in 2015 and 2016 and climbed in 2017 and 2018 and now the cost of one metric ton of milk powder in the world market is US$ 3250-3350.

Furthermore, the depreciating rupee, now valued at Rs. 184 to a dollar has only continued to worsen the situation, making it more expensive to import milk powder.  “Importers of milk powder are squeezed between the tax (which raises costs), the controlled price which sets a ceiling at which the product retails, and now the depreciating rupee which further raises import costs” says Ravi Ratnasabapathy, Resident Fellow of the Advocata Institute.

The floor price encourages production which the market is sometimes unable to absorb, leading to gluts which cannot be converted to powder (the only long term storage form of milk) due to the controlled price.

A recent report by the Advocata Institute, Price Controls in Sri Lanka, emphasizes the contradictory trajectory of policies in the dairy industry. This tangle of taxes and controls comes at a cost to consumers. Our costs are increasingly becoming apparent by visible shortages of milk powder in the market.

Key Recommendations

1. High import taxes lead to massive costs for milk powder importers. Changing this would not only mean cheaper milk for consumers, but also cheaper raw materials for downstream processors such as the biscuit or confectionery industry.

2. The removal of the Maximum Retail Price would allow for a higher level of healthy competition among both importers and local dairy manufacturers, allowing market forces to decide prices.

3. It is necessary that the government recognises that given the several supply constraints, the objective of self sufficiency is not realistically attainable in the Sri Lankan context. Thus, authorities should recognise the importance if imports in meeting demands of consumers and implement well-thought out measures to level the playing field between importers and domestic producers.

Anuki Premachandra on sanitary napkin taxes and its effect on cost of living in Sri Lanka

Advocata Research Communications Manager, Anuki Premachandra joined Biz 1st In Focus to shed light on the exorbitant taxes on sanitary napkins and its effects on the cost of living, education and health.

Ravi Ratnasabapathy on Budget 2019

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