The pre-election opportunity ECT presents the President

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

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By Dhananath Fernando and Shanaka Paththinigama

The East Container Terminal (ECT) has come into the limelight again.

Last week, a strike was ongoing by trade unions demanding to install gantry cranes, which were ordered a few years ago and which are now in the Colombo Port, at the ECT.

This was followed up with the Cabinet Spokesperson stating that it was “allowing the respective line Minister to conduct discussions at a diplomatic level on changing (the) Colombo Port Terminal deal with India and Japan”, according to Hellenic Shipping News Worldwide.

Subsequently, the Gantry Cranes were permitted to be unloaded and installed on the instructions of Prime Minister Mahinda Rajapaksa and the port workers decided to call off their strike on Thursday (2).

The fact of the matter is that the ECT is one absolute failure in terms of “getting things done”. Sri Lanka has been running it continuously and like many other economic issues, we have failed at getting our act together. This is despite being located at the heart of a strategic maritime route. Rather than taking advantage and converting the ECT to an operational level, we have lost a reasonable amount of credibility in the business world by opening the ECT for bidding and cancelling the bidding process on multiple occasions, thereby creating years of operational delays based on political favours. We hope, at least this time, Sri Lanka will be able to convert shop talk into actionable outcomes.

Understanding the shipping business

The shipping business is a technical subject and is very complicated. Ports are strategic geographical locations which are situated at the edge of oceans, seas, rivers, or lakes. These locations are then developed to provide facilities for the loading and unloading of cargo ships. The facilities provided for a port depends on the purpose for which the port is being used. A terminal refers to the set of facilities at a port where the loading and unloading of the cargo/container takes place. Terminals are named on the basis of the type of cargo that can be handled by it. Some of the most common types of terminals are container terminals, bulk cargo terminals, and LNG (liquefied natural gas) terminals.

Simply put, in one port, there are multiple terminals and the Port of Colombo has a few container terminals (CICT – Colombo International Container Terminal, JCT – Jaya Container Terminal, SAGT – South Asia Gateway Terminal, and UCT – Unity Container Terminal).

Global trade and most merchandise exports and imports account for a greater share of container terminals. The main factor that drives this business is efficiency and the networking ability to bring as many vessels as possible to the respective terminal. Simply put, when a ship enters the port/terminal how fast we can handle the containers and cargo (efficiency) and how networked we are to bring more vessels into the terminal are the two main determinants of making the business profitable.

Like most businesses, the price or the cost is a key determinant. To be profitable and bring the price down, over the years, shipping vessels have advanced to a point where there is capacity of more than 10,000 TEUs (20-foot equivalent units) in one vessel and those models (New Panamax – 12,500 TEUs | Triple E – 18,000 TEUs) have become popular with the development of global trade. These gigantic vessels can only be managed by deepwater ports which have a depth of more than 18 metres.

What’s all the fuss about the ECT?

There are two deepwater ports in the Colombo Port. One is CICT (85% owned by the China Merchant Port Holdings [for a period of 35 years, starting in 2013] and 15% by the Sri Lanka Ports Authority [SLPA] [owned by the Government]), which contributes to a higher share of the capacity and efficiency of the Colombo Port. The other deepwater terminal is the ECT. This is why the level of interest in this port is very high.

Geopolitical rivalries China, Japan, and India continue to seek operational ownership of the ECT through companies of their respective countries. The JCT (owned by the SLPA), SAGT (owned by John Keells Holdings – 42% , Mearsk – 26%, SLPA – 15%, A.P. Moller – 7%, Evergreen – 5%, and other investors – 5%), and UCT (owned by SLPA) are all shallow-water port terminals which can only handle smaller vessels (not economical compared to larger vessels) with about 10,000 TEUs capacity.

The ECT’s value is very high as it’s the only other deepwater terminal in the Port of Colombo except for CICT. As an additional benefit, it is located in the middle of the old port and the modern port, providing an added advantage for the movement of inter-terminal cargo, given its proximity to other terminals.

Despite the ECT having significant strategic value, consecutive governments have been just sitting on this, calling for bids and cancelling them, while competition is increasing every day – notably, the new Sagarala port development initiative by India, the construction of the Enayam Port in nearby Tamil Nadu, and also the Kerala Port, which is soon to be the world’s deepest multipurpose port.

With the agreement with SAGT due to expire in 2030 and with India developing their ports, the ECT has become a vital business asset as never before. Another deepwater port terminal operator adjacent to CICT will create more competition. However, the networking and other variables will matter to whoever gets the bid for the ECT.

At the same time, with the growth of global trade (not considering the effects of Covid-19), the Colombo Port is nearing full capacity of handling containers. The Port of Colombo moved to the top position of the Fastest Growing Port Index in the first half of 2018 by industry analyst Alphaliner and is one of the most connected ports in the entire world, handling about seven million TEUs in total. It is vital that the ECT is developed to maintain this growth.

Despite being situated in the centre of the Indian Ocean, and even though we are one of the most connected ports in the world, we are far from becoming a maritime hub. The root cause lies in our inability to be competitive and inadequacy to provide ancillary services such as logistics, bunkering, marine lubricants, fresh water supply, offshore supplies and ship chandelling, warehousing, and many more.

Our rules, regulations, and legal structures on the ownership of some shipping-related services and excessive government intervention, with the government acting as a player in the market and a regulator at the same time, has closed the space for private investment which could propel the Colombo Port to becoming a key global player.

Most experts have become weary of speaking about the same issues, while the opportunity of becoming a maritime hub in the Indian Ocean is slipping out of our hands.

Since the shipping business is based on efficiency and networking, the ECT has to be operated by a private operator and the Government should play a regulatory role and facilitate businesses by being the landlord of the port. This must be done while keeping the ownership of the port rather than trying to engage in the business and be a container terminal operator. Container terminal operation requires sizable capital investments. Private investments, which take the risk for the capital they invest, is the only possible way to create the right incentive structure and create the drive for efficiency and a very competitive business model.

Selecting a good terminal operator

After going back and forth, the previous Government signed a Memorandum of Co-operation (MoC) between Sri Lanka, India, and Japan. According to media reports, the current Government expects to discuss changes to the initial agreement, claiming that the previous deal was unfavourable for the country, and move to a new agreement.

At the same time, the SLPA unions claim that gantry cranes worth $ 25.7 million have been purchased for the development of the ECT, but concerns have been raised over the specifications of the cranes.

We really don’t know the truth

However, His Excellency the President, who received 6.9 million votes for a system change, should explore a method to select a proper operator. Undoubtedly, rather than handpicking operators based on introductions given by individuals, it has to be on a competitive bidding process, based on cost and pricing to ensure the competitiveness of the port with proper specifications. That’s the best system we can employ to find the most suited operator in a price-competitive industry.

Generally, Build-Operate-Transfer (BOT) agreements are provided with long tax holidays and the taxpayer has to be protected and prioritised as it is the people who gave the mandate for a system change.

At the same time, when the existing terminal operators bid for the project, their existing capacities and advantages need to be reflected in their pricing, investment, and proposal structure. The system change expected by the taxpayer, in this case, is to set up a system to ensure accountability and that things get done while getting the maximum benefit to the port and by establishing a level playing field for businesses and investors.

In countries like Sri Lanka where discussions revolve around high-value government transactions, there is a higher risk of such projects being influenced by many powerful businessmen and bureaucrats, leading to irregularities and corruption.

The President and the Government now have an opportunity to prove such assumptions wrong and set a prime example of how such a high-level transaction can be transparently managed. A single transaction with a conflict of interest can make a regime unpopular faster than anyone can expect. The Central Bank Bond irregularity is the most recent example.

On the verge of a crucial election and with the prospect of forming a fresh government, we hope Sri Lanka would move forward instead of dragging its feet on the ECT by ensuring and implementing a competitive bidding process (which will help avoid most of the geopolitical pressures) without getting sandwiched in between two global economic powers vying for regional dominance.

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.

Blaming the banks: Why a credit guarantee is better

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

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By Dhananath Fernando

The Central Bank of Sri Lanka (CBSL) is in the spotlight yet again. Questions have been raised as to whether the CBSL and the banking system have been provided sufficient facilitation to contain the health crisis (that has been contained successfully at the moment) which led to an economic crisis.

The Government announced a series of economic relief packages since the beginning of the Covid-19 pandemic, including a Rs. 5,000 allowance for the most vulnerable sections of society and for the rescheduling of leases and loan facilities. Currently, the discussion is not on what the relief measures are, but rather on how we can execute them in the right way or whether we have better alternatives.

First, let’s understand the context. The CBSL offered a Rs. 50 billion refinancing facility in March, which was then increased to Rs. 150 billion in June. By the time the second scheme was announced, Rs. 27.5 billion of the original Rs. 50 billion had been given out. The CBSL offered the Rs. 150 billion credit facility to licensed commercial banks (LCBs) at 1% interest where the banks have to provide 4% interest to their customers affected by Covid-19.

Additionally, the CBSL brought the Statutory Reserve Ratio (SRR) to 2% from 4%, increasing liquidity (availability of money) in the market. The deposit that needs to be kept at the CBSL by banks as a percentage of total deposits is called the SRR. This means that when a customer deposits Rs. 100 in any LCB, the respective LCB has to deposit Rs. 2 to the CBSL which will not be paid any interest. Earlier, the banks had to deposit Rs. 4 and now it has been brought down to Rs. 2. As a result of this decision, out of the total deposits of all LCBs in Sri Lanka, 2% has been released to the market. That is depositors’ money.

The process of getting a working capital loan for a business is as follows: The businesses can apply for working capital loans from their respective LCBs and upon their approval, they send the application to the CBSL and the CBSL provides the money from the credit line they established, which is Rs. 150 billion. The CBSL provides money to LCBs at 1% and they give the loan to customers at 4%. The main question is how the CBSL got Rs. 150 billion in the first place. That was through money printing or money creation.

Additionally, banks now have more money from the reduction of the SRR, which can be used for other investments, to provide credit facilities, or as a deposit at the CBSL to earn an interest. The CBSL offers a 5.5% interest to LCBs parking excess money at the CBSL, which is called the Standing Deposit Facility Rate (SDFR). The CBSL has a similar facility where LCBs can borrow money if they run short of money, which is called the Standing Lending Facility Rate (SLFR) which is at 6.5%. A few challenges we may face in the future in this context are outlined below.

Challenge 1 – refinancing previous loans

When a loan scheme is available at a 4% concessionary rate, there can be instances when unnecessary loans will be applied for, to settle previous loans which have been taken at a higher interest rate. In the overall system, it may indicate that the CBSL and other banks have provided adequate loans under the newly established credit facility for Covid-19, but the ground reality may be that many businesses who have a solid working relationship with banks and bank managers will refinance their previous facilities.

The same has been experienced in large-scale loans under the previous Government’s Enterprise Sri Lanka loan scheme. It was reported that some established companies incorporated new companies just on paper to get the concessionary loan to refinance previous facilities. It was alleged that the majority of politically connected individuals received the loans and in most cases, the loans were canvassed to known businesses by bank managers themselves, avoiding customers who truly had financial needs. For bank managers, it is safer to provide a loan to a known business entity with a track record and good relationship, rather than taking a risk in a challenging business environment and risking underperformance in bank manager/branch key performance indicators (KPIs).

Challenge 2 – risk of market distortions and increasing expenses in CBSL

Since the CBSL pays 5.5% on deposits by the LCBs, banks have a higher incentive to simply earn a 5.5% interest with minimal administration cost, rather than providing a loan facility at 4% for the customers with a 3% interest margin, which also requires a significant amount of administration work. The banks will most likely park the excess money they received from the SRR cut and deposit it at the CBSL. This would increase the interest expenses for the CBSL. LCBs may also consider investing the excess money in bonds and other investment instruments which may distort those markets as well.

The positive side to this is that since banks park their liquidity back in the CBSL, the risk of inflation due to excess liquidity is somewhat minimised, but it will not bring the expected economic revival post-COVID-19. The non-performing loan (NPL) percentage has already increased to 5.1% as business recovery was very slow even before the Covid-19 pandemic, due to the Easter Sunday attacks. Similar concessionary loan facilities were provided to businesses impacted by the Easter attacks and it is highly likely that NPLs will increase.

As a result, banks may have a natural reluctance to provide facilities as they have a lucrative and stable option available without risking depositors’ money. The CBSL may push banks to provide loans as much as possible due to the lack of a correct incentive structure, which will lead to an impact on the stability of the banking sector and result in loans not reaching the right target audience.

Challenge 3 – pressure on LKR compared to USD and foreign currencies

By the time the CBSL announced the SRR cut and the Rs. 150 billion credit line, there was about Rs. 223 billion excess money in the financial system. The problem was not a lack of money (liquidity) in the financial system but the reluctance of banks to absorb risk to provide the facility to the impacted customers. At the same time, the mechanism of dispatching loans was not efficient and all banks were just depending on the Credit Information Bureau of Sri Lanka (CRIB) without having a risk-based credit assessment system to determine the borrowers’ ability to settle the loans and offering different interest rates based on the risk assessment. Additionally, the delays in banks’ internal approvals may not be supportive, given the urgent need of facilities and higher demand.

Now, as a result of excess liquidity, inflation may increase and the Sri Lankan rupee (LKR) will face further pressure to depreciate, leading us towards a Balance of Payments (BOP) crisis. Bringing the SDFR and SLFR down will bring down all interest rates in the market which will result in more money (liquidity) in the market, adding further pressure on the LKR.

In summary, the reluctance of banks to take the risk to provide loans in a challenging environment by risking depositors’ money is the problem, not the lack of liquidity in the market.

A workable solution

It is challenging to find an ideal solution for very complicated problems as our economic fundamentals have not been good for decades. Most variables are interconnected so we have to make a compromise in one of the areas. As the problem is not the lack of money supply, but rather the banks’ reluctance to take risks with regard to loan recovery, a credit guarantee by the Government could have been the first line of solution. That would minimise the risk taken by the banks without adding excess liquidity to the market and distorting other market sentiments.

Ideally, the Government credit guarantee has to be backed by a foreign funding line (USD funds) and this column has been promoting the idea of a bilateral loan with a neighbouring country or active engagement with the International Monetary Funday (IMF) for a fund facility, given the international sovereign bond settlements starting from October. The government guarantee can be provided on an agreed ratio where small loans are fully guaranteed by the Government and for bigger loans, the bank and the Government share the risk, where early instalments first cover the risk of the bank and their depositors.

One bottleneck for the Government in providing a credit guarantees scheme is the past mistakes made with our state-owned enterprises (SOEs). Multiple back-to-back credit guarantees have been provided to colossal loss-making SOEs like SriLankan Airlines, Ceylon Petroleum Corporation (CPC), and the Ceylon Electricity Board (CEB). Successive governments turned to these last resorts very early to fund completely unnecessary operations and now, faced with a real crisis, we have run out of solutions.

However, in a recent interview, Dr. Nandalal Weerasinghe mentioned that the Treasury wanted to create money and support businesses instead of providing a government credit guarantee. The reasons for these instructions are yet to be clarified by the Treasury. However, Dr. Weerasinghe has alerted the potential risk of excessive money printing on banking sector stability.

When the Easter Sunday attacks impacted the economy, we never expected a global-level pandemic of this scale. The lesson is that we should not underestimate the possibility of similar pandemics and market disruptions with climate change and a dynamic global environment in the future. I sincerely hope that there will be no calamities for the next few years as there is a lot we all have been hoping to achieve for decades.

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.

SOE sector: Promises of change on the horizon?

Originally appeared on Daily FT

By Maleeka Hassan

With the harsh reality of a global recession slowly descending on Sri Lanka, questions about Government expenditure and its allocation of resources have begun to dominate dinner table discussions. Fears of higher taxation to cover the losses earned and to sustain the blows from the impending recession have started to emerge.

There is a simple solution: introduce reforms to prevent areas for corruption and inefficiency within SOEs – thus preventing the State from bearing tremendous losses. However, there is hesitation and discomfort amongst the general public, when consolidation or privatisation of SOEs are discussed. This begs the question: why?  

Why are SOEs so popular amongst the public?

One of the reasons could be due to the portrayal and framing of the SOE sector, over the years. SOEs are perceived by the public as a source of stable employment as well as a source of goods and services at affordable prices. This perception is backed up by the fact that the SOEs hire over 200,000 people; framing the sector as ‘people-oriented’ over ‘profit-oriented’, with no consideration given to the losses sustained by these entities. Moreover, privatisation is often viewed in the same light as capitalism: cold, hard and unforgiving.

This perspective could be propelled by our history with the SOE sector. In the 1980s, the incumbent Government was pushed to reform the SOE sector. This was due to SOE products struggling to remain competitive amongst imported substitutes and therefore turning to the State to fund and sustain most of them. In addition, foreign aid agencies lobbied the Government to adopt a privatisation programme in order to secure external aid. However to avoid backlash from labour unions and state employees, the media and other campaigns around the policy were careful to avoid associating the policy with employee redundancy. Privatisation was concealed by the word ‘peoplisation’, and involved providing 10% of the shares to employees from former public enterprises.

Another reason behind the immense support for SOEs could be due to their heavily subsidised products. However, when products are sold below cost, the cost is still indirectly borne by taxpayers in the form of higher taxes, to recover the loss. The belief that privatisation will result in the prices of goods rising is contingent upon the creation of a monopoly. However, with the reduction of red tape and appropriate measures taken to prevent anti-competitive practices, prices may reduce or remain the same in a competitive market. An example of this was the conversion of Sri Lanka Telecom to a public company. This resulted in an improvement of internal operational efficiency and the number of new connections provided increased from 72,457 in 1997 to 143,075 in 1998.2

A similar reason that may have contributed to shaping current public opinion that SOEs are most effective at serving the people when they remain public, was the introduction of ‘The Revival of Underperforming Enterprises or Underutilised Assets Act’ of 2011 (also known as the Expropriation Act). This is where 37 businesses that were classified as ‘underperforming and ineffective’, were nationalised – suggesting to the public that privatisation wasn't always effective and ideal. However, these attitudes may be fuelling the problem.

Why are these perceptions wrong?

By utilising the narratives above, certain SOEs and officials attached are able to conceal corruption and nepotism behind the idea of employment, and ‘helping the people’. An example of this is the Sathosa scandal that emerged earlier this year, relating to 67 files that tied Sathosa to controversial transactions, such as land deeds that were purchased under various names and involved hundreds of acres, that cost the State billions of rupees.

Similar instances of bribery are easily carried out, and go unrealised, due to the absence of monitoring and oversight of the rest of the 524 SOEs that are ‘not essential’. The lack of transparency with regards to the financial reports of the SOEs makes it easier for these companies to commit such acts. In the Annual Report for 2019, published by the Ministry of Finance (MOF), only 14 SOEs had submitted their Annual Reports for 2018 out of the 52 that are monitored by the MOF and Public Enterprise Department (PED). Even more worrying is the fact that 21 out of the 52 companies hadn't submitted their 2017 Annual Reports either. 

Despite the introduction of the COPE reports and the appointment of the Department of Public Enterprises (PED) to monitor the operations and efficiency of SOEs, the SOE sector continues to amass tremendous losses. The recently published Annual Report by the Ministry of Finance estimates a total loss of Rs. 151,439 million from the 52 essential SOEs for 2019 based on provisional data.

These numbers would change drastically if they included data for the rest of the 524 SOEs (which include subsidiaries and sub-subsidiaries that have been gazetted but are not monitored by the Ministry of Finance, due to them not being ‘essential). The opacity of this sector would usually raise alarm bells amongst the Sri Lankan public if it was occurring anywhere else – and yet it doesn’t with SOEs. change drastically if they included data for the rest of the 524 SOEs (which include subsidiaries and sub-subsidiaries that have been gazetted but are not monitored by the Ministry of Finance, due to them not being ‘essential). The opacity of this sector would usually raise alarm bells amongst the Sri Lankan public if it was occurring anywhere else – and yet it doesn’t with SOEs.

Evolving circumstances propelling change

Despite these concerning particulars, there may still be hope on the horizon. The manifesto of President Gotabaya Rajapaksa indicated that whilst privatisation was not up for consideration, consolidation was still an option. Additionally, a board was appointed to select the heads for loss-making, inefficient SOEs, in order to reform and improve such entities.

More importantly, however, is the question of SOEs in a COVID-19 economy. 

With predictions for Sri Lanka’s estimated real GDP (percentage change) for 2020 amounting to -0.5 due to COVID-19, some economists predict that large scale reforms may be introduced in order to improve efficiency and increase its global competitiveness when seeking foreign direct investment and increased capital inflows. These reforms may extend to the SOE sector – in order to improve the financial accounts of the country and to reduce room for corruption and bribery.

What reforms can the Government adopt?

Reform of SOEs, focusing on underperforming entities, in particular, could create some much needed fiscal space for the treasury. The first phase of reform would be improving governance and accountability in SOEs. The Government should compile a comprehensive list of all SOEs; at present, the Government only tracks the financial of the key 52 entities. This should be expanded to include all entities. Clear reporting guidelines for SOEs should be introduced and enforced, with COPE and COPA strengthened to improve accountability. If these reforms are adopted, the SOE sector will increase productivity and efficiency immensely, saving the Government and the average taxpayer – millions of rupees.

The second phase of reform would be on the consolidation of SOEs. Of Sri Lanka’s 524 SOEs, the Government recognises only 52 of these as strategic or key entities. In line with Government policy, underperforming, non-strategic SOEs should be identified for a consolidation plan. 

This may be the golden window of opportunity to reform and improve the transparency of the sector, but if missed – may not come again for a long time. 

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.

The ingredients of a ‘system change’

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

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By Dhananath Fernando

The mandate given by the people of Sri Lanka to His Excellency Gotabaya Rajapaksa can be interpreted in multiple ways. All interpretations funnel down to a single insight: Change the system. The word “change” is powerful. However, “change” is difficult to execute. In contrast to setting up things from scratch, altering an existing system is not an easy task under any circumstance. 

The President’s desperation is clear. He has been given a mandate to “change the system” in five years; of which, seven months have passed. With elections coming up, it seems that it will take almost 10 months to really get to the starting line. In other words, the existing “system” itself has pushed the man in charge of “system change” to the wall and the clock is ticking.

Last week’s column discussed the systems that need change and how the President could start. We highlighted that state-owned enterprises (SOEs), public transport, land reforms, and e-courts would be the four big aspects that can be implemented with minimal capital investment. If the President succeeds, the people of Sri Lanka will be able to witness a considerable change in their standard of living, and it is important that the opinion leaders support this system change in a democratic framework, and leaders at the frontline make sure the changes take place within the same framework.

Today, let’s explore a few insights on how to execute a system change. 

Understanding the system

If you ask the common man: “How can we change the system?”, a popular answer is that we can do it by imposing strict laws and regulations. Some believe the leader has to be firm and critical and supervise their team closely.

While the aforementioned is true, a sustainable system change requires the establishment of three main components: (1) ownership of the system, (2) incentives and rewards, and (3) accountability and capable people who drive the system.   

If you look at the current inefficient system, it is completely faulty due to many factors. The incentives in most government institutions and systems promote inefficiency; a system where work is delayed, and individuals are paid overtime to reward that. 

Take our judiciary system for example. In most instances, lawyers charge their clients based on the number of appearances, so the incentive is to have more appearances. Therefore, postponing cases is common and as a result, the average time taken for contract enforcement is 1,318 days with 22% of claim value. There is no pressure to finish a case within a stipulated time frame, so there’s no accountability and monitoring. 

At the same time, there is no ownership for the system as individual performance is not measured and no one will be questioned on the delays in procedure. Imagine a scenario where you hire a mason bass for a small-scale construction project at a daily rate, but you fail to monitor his work. The obvious result would be that the work will go for months, making the system completely inefficient. 

Ownership of the system

Any successful system runs on the ownership of risk. A main reason investors want to engage in businesses is because they have invested risk in the form of money, reputation, time, etc. This means they have an ownership stake and an interest to recover what they invested. For a system change, the upcoming government and President are required to consider engaging people who invest risk in the form of money, reputation, time, etc. and provide them with the opportunity to own the system as well as the results of their action.

Public-private partnership (PPP) is a great model to consider and many forms of PPPs are available and it just requires detailed attention. This would be a fundamental factor in changing any system. 

On that basis, the appointment of the ministerial portfolios’ board for SOEs cannot be just a blanket appointment – an ownership of risk has to be associated with it. In implementing large-scale projects, the President advised a few months ago, to explore acquiring investment from the private sector instead of taking loans and expanding debt stock. That means getting private investors to invest their money (risk) in projects which they can recover through profits. 

The Government can incorporate similar practices to a range of sectors. The government sector is too large, from managing airlines to managing cashew production. It will be difficult to bring private risk ownership across the board, but we can roll it out on a priority basis. Until we get the election results, time can be spent on setting up ownership structures for key institutions and a mechanism on how they can invest risk into the system. The structures have to differ based on the sector and on the type of the business and service model. Take our President for example, who has an ownership of the trust of 6.9 million people where he has invested risk. Hence, he is under pressure to deliver results. Shouldn’t the same be applicable for the rest of his supporting divisions?

Incentives and rewards

Setting up the correct incentive structures and rewards is the second important factor in a fluid system change. The current incentive structure is driven by inefficiency and corruption. Regardless of whether you perform well or underperform, you get the same benefits. So no one has an incentive to take things into their hands and do it differently. The recent discussion on the Central Bank is a good example. Whether the Central Bank maintains monetary stability, regulates license banks and non-banking financial institutions (NBFI) in the right manner or not, their destination won’t change. 

Incentives can be negative and it should not need to be positive always. If there had been a positive or negative incentive structure bearing on salaries of bureaucrats on maintaining the stability of NBFIs, I am certain they would have taken matters more seriously instead of waiting for some financial institutions to collapse completely (institutions need to provide the necessary legal authority to regulate effectively). Having regulations without incentives is a sure way of not fixing the system. 

If you are surprised by the friendliness and politeness of hotel staff, it is not just because they were asked to do it or not because the management installed CCTV cameras, but it is because they receive a financial incentive for being friendly. At the same time, we should not misinterpret that the hotel staff is kind and pleasant just because of the financial incentive. The fact that their genuineness is incentivised, which in turn makes system efficiency sustainable, is the bottom line.

Accountability and people 

Checks and balances have to be maintained if we are to monitor and evaluate the incentives and ownership of risks. That is where “accountability” and the people who drive “accountability” matter. If we have the accountability structures, we can make decisions based on meritocracy.

For example, most of the SOEs haven’t produced their annual accounts or annual reports. Most of these institutions do not even have a website. Most of the institutions that have a website have only updated the welcome message by the newly appointed minister. 

The people who drive reforms have to make a significant contribution. However, we have to keep in mind that the people-driven regulatory model where a system change is driven by personality and personal charisma has a shorter life span. But without the right people, it would be difficult to drive a system change.

We need people who can drive the system to overpass their personal charisma, so even without their presence, the system starts to function. The next government will have the challenge of identifying the right people who can fix a system rather than just pushing on getting daily operations done.

For the right people who have been identified to change the system, the broader mandate is straightforward; identify ownership structures, identify incentive systems, and set up accountability procedures are the main mandate. We should not confuse the skill of “changing the system” with project management skills. “Changing the system” is a unique visionary sport. There could be good project managers, but transforming to a system change goes far beyond project management, although it has some components of project management. 

System changes are not popular

We need to remember that system changes are not popular. Most of the people who demand a system change are usually beneficiaries of the inefficient system. Changing the system will have a direct impact on them and resistance may come with it. That is why the transferring of ownership of risk comes to the forefront when looking to change the system. 

It is important that we learn from past mistakes. The previous government too received a mandate for a system change to establish rule of law, but the same people who gave them the mandate decided to pick a different regime, again, pretty much on the same promise, that is to “change the system”.

Ownership, accountability, and the right people who could drive system changes were not in charge of policy implementation during the last Government; all were preoccupied with micromanagement without looking at the bigger picture or considering rapid implementation.

Policy statements of the main leaders of the Government went in two different directions, as did the heads of ministries and their officials.

The Vision 2025 policy plan was introduced a considerable time after taking office. The policy statements on institutions were contradictory and as per media reports, and the basic composition of the security council was questionable. 

System changes are visible, and people will experience tangible differences, such as in the government balance sheet. There will not be a better time than one of crisis to engineer a system change – we should not waste this opportunity.

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.