The State of State Enterprises

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

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

Advocata Institute Launched in Colombo

Advocata Institute was launched yesterday with the release of our inaugural report titled “The State of State Enterprises”.  The event was held at the Lakshman Kadirgamar Institute Auditorium in Colombo and was attended by high ranking public officials, deputy ministers, academics and invitees. Deputy Minister Wickramaratne was presented with the inaugural copy of the report.
 

The event was keynoted  by Prof. Rohan Samarajiva, an advisor to Advocata and included speeches by Advocata COO Dhananath Fernando and Prof Razeen Sally.  Prof Samarajiva offered potential ideas for the state enterprise reform and spoke about his experience as a regulator during what was hailed as the successful part-privatisation of Sri Lanka Telecom.

Prof Razeen Sally speaking about the importance of a think tank working on issues related to economic freedom said, that much needed to be done in Sri Lanka to stem the tide of reversing liberalisation that the country has experienced in recent years.

The event also  featured a panel discussion that included the chief guest of the evening Deputy Minister of Public Enterprise Development, Eran Wickramaratne,  Advocata fellow Ravi Ratnasabapathy, as well as Prof Rohan Samarajiva and Prof Razeen Sally.   

The panel discussed reform ideas, including the holding company model after successes in the Singapore Temasek holdings. Several commentators in the panel discussed however the need for privatisation to be brought back into the public conscious as an ultimate solution.  Deputy Minister insisted that the government is looking at reforms on an industry-by-industry and case-by-case basis.

Dhananath fernando, the chief operating officer of Advocata Institute said that Advocata hopes to be an independent voice advocating liberal economic ideas based on sound research.


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