Partial privatisation: A happy middle ground?

In this weekly column on The Sunday Morning Business titled “The Coordination Problem”, the scholars and fellows associated with Advocata attempt to explore issues around economics, public policy, the institutions that govern them and their impact on our lives and society.

Originally appeared on The Morning

By Sumhiya Sallay

Reforming Sri Lanka’s state-owned enterprises has been part of the new Government’s policy agenda. With 527 SOEs, Sri Lanka has an excessive number of state-owned enterprises. Financial reporting of these enterprises has been low, and the Ministry of Finance has published the financials of only 54 of these state-owned enterprises, which have been classified as “strategic”. The losses of these 54 are staggering enough; in 2018, they made a net loss of Rs. 26 billion, thus making it clear that reform in this sector is badly needed.

The Government has committed itself to transforming them into profitable entities; a committee has been appointed to hire technocrats onto the boards of these state enterprises, and the committee has called for applications. While this is commendable, the reform agenda appears to end here; the next step of privatising some of the loss-making, non-strategic state enterprises has been taken off the table. This is made abundantly clear in the Government’s National Policy Framework, which states that it will enact laws to stop the privatisation of state enterprises.

If privatisation is off the table, what can be done?

The three main state enterprises – Ceylon Petroleum Corporation (CPC), Ceylon Electricity Board (CEB), and SriLankan Airlines – recorded a combined loss of 1.3% of GDP in 2018, compared to 0.5% of GDP in 2017. Given that the expected revenue loss from the recent tax cuts is an estimated 2% of GDP, it is clear that turning our state enterprises around would go a long way towards achieving the fiscal targets set by the Government.

If the Government has taken the option of privatisation off the table, but wants to actively transform state enterprises into profit-making entities, the option of private management should not be dismissed in the same breath as privatisation. Private management of state enterprises would essentially be partial privatisation. In this scenario, the Government would share ownership of the enterprise with a private company, and the management of the enterprise would be transferred to the private company. In the case of strategic enterprises, the Government could retain majority shareholding.

A government’s primary responsibilities towards its country and people should not be the management of business enterprises; the government has a responsibility to uphold the rule of law, ensure national security, and protect the rights of its citizens, and the management – or in this case the mismanagement – of state enterprises should not make the list. A government is the entity that sets the rules of the game; it details out the laws and regulations that govern businesses. When a government also enters the playing field, there is an inherent conflict of interest that occurs. Even if the government remains impartial, it does not have the necessary incentives in place to run a business successfully.

However, when a private entity manages a business, they would look at increased profits as the business is under their sole control, and any losses they make or issues they face would be their responsibility. The incentive is to minimise losses and make the business more productive. A private entity managing state enterprises would absolve the Government of having to invest in loss-making public enterprises and reduce government borrowing.

Further, private management would bring down fiscal and administrative pressure of state-owned entities and remove the huge weight of having to manage state enterprises off the Government’s shoulders. This encourages the Government to work towards providing increased quality of living for the people through effective governance, rather than spending so much of its time and money on managing businesses.

The idea of partial privatisation, initially, may be a challenge to implement, but in the long run, it would result in highly effective results. This would also mean that there would be less political influence on the management of state enterprises.

It has worked before, so why dismiss it?

Looking back at partial privatisation in Sri Lanka, a significant achievement has been the liberalisation of the telecommunications industry. This was implemented in order to provide better services for customers through competition and industry development through private sector participation. Both customers and society as a whole benefited from it as there was a reduction in call charges (tariffs), improved telecommunications in rural areas, decrease in equipment costs, industry profit growth, increased government revenue, etc. This example of partial privatisation shows us the benefits not only the Government but also the people would gain. Taking into account these loss-making state entities and the debt repayments the Treasury will have to make over the next few years, the option of partial privatisation by the Government should be seriously considered.