The State’s business is no business at all

By Dhananath Fernando

Originally appeared on the Morning

We can’t judge a book by its cover, but in the Sri Lankan Presidential Election, we can certainly gauge many people’s futures based on what is said about State-Owned Enterprise (SOE) reforms.

The simple truth is that we can only progress with SOE reforms. These reforms are rare and even mentioning them on a political stage requires courage. However, the fact remains that there is no future without SOE reforms.

Given the resistance by political leaders, this column is another attempt to reiterate why the State should not engage in business and how State involvement in business impacts all citizens.

Why should the State not do business?

The role of the State is not to do business but to ensure the rule of law. As the saying goes, “When you do something, you are not doing something else.” When the State engages in business, it neglects its primary duty – upholding the rule of law, which is its core mandate.

Another reason the State should not do business is that it has a unique way of participating in every business as a mandatory shareholder through the tax system. Every corporation is required to pay 30% of its profit to the State, which is essentially the Government’s share.

Additionally, businesses must pay an 18% tax based on their income. This means that the Government collects more than 50% of the profit value without doing anything. Since the Government is already collecting money from all businesses, there is no need for it to engage in business directly.

Why sell profit-making SOEs?

A common argument against privatisation is, ‘why sell profit-making SOEs?” The answer is that the State has no role in business, and even if these enterprises are making a profit, those profits must be evaluated against the value of the assets.

For instance, the Sri Lanka Cashew Corporation has an asset base of about Rs. 500 million, but its annual profit is only around Rs. 14 million. This translates to roughly Rs. 1 million per month. Does it make sense to run a business that generates just Rs. 1 million in profit after tying up resources worth Rs. 500 million?

If we had Rs. 500 million, even the safest investment, such as a fixed deposit at a 6% interest rate, would yield about Rs. 30 million per year, which is more than double the profit of the Cashew Corporation. Just because an enterprise is making a profit doesn’t justify the State continuing to run it if we can’t maximise the return on those assets.

What about the SOEs of Vietnam and South Korea?

Like Sri Lanka, both South Korea and Vietnam had significant SOEs in the 1960s due to limited private capital. As private capital slowly developed, both countries began reforming their SOEs. These reforms included privatisations and gradual government withdrawal through corporatisation.

In Vietnam, there were about 5,600 SOEs in 2001, which was reduced to 3,200 by 2010 through various reform packages under the Doi Moi reforms. By 2016, the number of SOEs had further decreased to 2,600, thanks to reforms including Public-Private Partnerships (PPPs) and corporatisation.

Vietcombank, which was a 100% State-owned bank, was listed on the Ho Chi Minh Stock Exchange as part of a pilot project in 1990. The State’s ownership was reduced by 75%, with 15% of the shares sold to Japan’s Mizuho Bank. Similarly, Petrolimex, a petroleum company in Vietnam, sold 9% of its shares to JX Nippon Oil & Energy on the Ho Chi Minh Stock Exchange.

In South Korea, Korea Telecom (KT) was fully privatised by listing it on the Korean Stock Exchange, New York Stock Exchange, and London Stock Exchange. The Korea Electric Power Corporation was also opened to private investors by listing on the Korean Stock Exchange in 1989 and the New York Stock Exchange in 1999. Other companies, like Pohang Iron and Steel Company, Korea Exchange Bank, and Korea Tobacco & Ginseng Corporation, also underwent reforms to allow private sector participation.

Vietnam attracted Nokia as a key investor for economic growth, while South Korea grew with Samsung and other electronics companies. If Sri Lanka wants to progress, we need to bring in world-class operators that can run these enterprises efficiently, rather than have the Government manage them.

Benefits of SOE reforms

SOE reforms offer a package of four solutions to our problems.

First, they boost Government revenue, as efficiently-run companies will generate higher profits, allowing the Government to increase its revenue.

Second, SOEs have significantly contributed to our sovereign debt, and reforming them can help reduce the national debt.

Third, Sri Lanka requires Foreign Direct Investment, and SOE reforms can serve as a channel to attract such investments.

Fourth, SOE reforms can help cut down Government expenditure, as these enterprises currently contribute to massive Government losses.

SOE reforms require political will because incorporating them into a manifesto is unlikely to attract votes; in fact, it may deter traditional voters. However, the moment of truth will come, and ultimately, we all have to face it – it’s just a matter of time.

Sri Lanka Railway railed with strikes and losses; Time to reform?

Originally appeared on The Morning.

By Anuka Ratnayake and Aaditha Edirisinghe

On 13 January 2022, the Station Masters’ Union launched a 24-hour token strike cancelling over 200 scheduled trips. As a result, commuters heading back home from Colombo, long distance travellers, tourists (both local and foreign) were all inconvenienced and left stranded in stations partway through their journey. Angry commuters attacked the train bound to Batticaloa when it passed the Kekirawa Station. This public outrage at the services provided by Sri Lanka Railway (SLR) is nothing new. However, little has been done to reform or restructure amidst public disappointment and escalating losses.

Why should the Railway be reformed? 

Operating as a Government institution under the Ministry of Transport, SLR is the country’s primary alternative mode of public transport to the often congested road network. Underpricing of railway fares along with systemic issues including mismanagement and poor governance have led to recurring annual losses. Despite budgetary support, the railway has recorded an accumulated loss of Rs. 46.7 billion in the years 2015-20. 

As with many transportation networks globally, the impact of Covid-19 has made SLR’s financial position increasingly precarious; with revenues down, losses amounted to over Rs.10 billion in 2020 alone. The widening chasm between the revenue raised and expenditure incurred, stood at a staggering Rs. 22 billion in 2018, as per official records. This has led to the dependence on Government bailouts. The Treasury spent a grand total of Rs. 48.7 billion in 2020, of which around Rs. 14 billion was for recurrent expenditure such as salaries, subsidies and grants. 

Sri Lanka Railway has an exceedingly large workforce with very active trade unions and an extensive bureaucracy. According to the official statistics of 2019, SLR has 14,207 employees. The total personal emoluments incurred for the same year was Rs. 9.8 billion, which was up by Rs. 809 million compared to 2018.

Due to the overstaffing issue, work duplication is often seen at SLR and is a serious issue affecting efficiency. Union actions are a burden on the operations of SLR, as observed during the last week of December 2021 and on 13 January 2022. 

In an interview conducted in January 2022, the Station Masters’ Association Chairman Sumedha Someratne claimed that as a result of the strikes in December, SLR incurred a loss as high as Rs. 20 million per day although the Railway General Manager quoted a much lower figure. 

A major reason for SLR’s budgetary reliance is the lack of cost reflective pricing. As of now, for a trip between 51-100 km, the fare per kilometre is around Rs. 3.30 for first class seats and Rs. 1 for third class seats. This underpricing has led to a reduction in the availability of funds to cover operational costs, resulting in the lack of finance for maintenance and repairs; by 2017, 65% of SLR’s locomotives were over 30 years old. 

The Urban Transport Master Plan 2014 identified several irregularities of the condition of the railway. A few noteworthy issues were the malfunctionings in the signalling system along with the deformation of rails and irregularities in alignment, which caused delays and sudden cancellation of trains. This poses a threat to passenger safety and is increasingly dangerous during inclement weather conditions. 

Reform recommendations 

Given that Sri Lanka is facing an economic crisis, the treasury cannot afford to shield SLR from the adverse repercussions of its inefficient operations. Immediate reforms are needed to get SLR back on track. 

Since most of SLR’s issues stem from its inability to raise sufficient revenues, the implementation of a cost-reflective fare structure should be prioritised. However, standing in the way of such price reform are the cheap fares of public bus service, the primary substitute to rail transport.

Therefore, for the price revision to be viable SLR should look into improving the quality of service to justify higher prices while reducing costs to be more competitive. 

Furthermore, to offset some costs SLR can focus on the profitable use of its vast asset base, such as its 13,000 acres of land which can be capitalised for this purpose. In 2017, it was reported that nearly 15% of land owned by SLR was leased to 6,400 users. Yet it has been unable to collect Rs. 1.46 billion in lease revenue from the users of the land owned by the department. Better management of real estate would bring in massive revenues to the Railway Department, which can be used to finance repairs and maintenance. 

Moreover, the Railway Department can focus on improving freight transportation, a lucrative and profitable source of revenue generation. According to the Asian Development Bank, by 2017, the freight transportation service market share of Sri Lanka Railway had eroded to less than 1%. The lack of necessary transportation and containerisation equipment limits the freight business to goods such as cement and petroleum. In the interest of expanding the freight service with the available resources; tracks which are reserved for passenger transportation during the daytime can be utilised under a night schedule. 

Furthermore, portions of SLR’s underutilised land can be used profitably for freight-related logistics services which will also bring in much-needed revenue to the loss-making institution.  

To bridge the prevailing investment gap at SLR, public private partnerships (PPPs) should be encouraged for operations and maintenance. A major bottleneck in SLR’s ability to deliver a consistent service is the outdated and malfunctioning infrastructure it owns, such as signalling and tracks. Investments in this respect will allow SLR to provide the public a consistent service while accumulating a sustained influx of cash. 

Colossal losses of state-owned institutions such as the Sri Lanka Railway is a burden on the state coffers, and ultimately the taxpayer. The Government’s increasing reliance on debt to keep such institutions afloat is compromising the economic future of Sri Lanka. Thus it is the need of the hour to begin reforming and restructuring potential cash cows such as Sri Lanka Railway. If reformed, Sri Lanka Railway would undoubtedly be a pillar of Sri Lanka’s transport infrastructure, contributing to the overall productivity of the economy.

The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute, or anyone affiliated with the institute.