We should privatize the government owned tourism businesses

by Ravi Ratnasabapathy

The Government has announced that it intends to sell a few non-strategic State-owned Enterprises (SoEs). The five entities that are earmarked for this are Colombo Hilton, Grand Orient Hotel, Lanka Hospitals, Hyatt Hotel and Water’s Edge.

There has been some vocal opposition to this move, which is surprising. Should the state be involved in operating these businesses?

This is a fundamental question on the role of the state in the economy. Opinions will differ, some will want it to deliver all basic services, others may argue that it should only provide the minimum, the market catering to the rest.

Whatever ones political persuasion it should be possible to agree one principle: that whatever activity the state engages in, the ultimate goal should be the improvement of public welfare. Keeping this in mind let us examine the impact that the sale of these entities may have on the public.

Of the entities that have been identified, two are hotels, one is a restaurant, one is a distributor of cooking gas and one is a hospital.

The oldest of these, the property of the Grand Oriental Hotel was acquired by the Bank of Ceylon in 1954. While the circumstances of this acquisition are not clear it is possible that the property was acquired in settlement of debts owed to the bank. The bank occupies a part of the building which it uses as an office while the hotel operates on the rest. Originally the hotel boasted 154 rooms but this was reduced to 54 when the bank occupied a part of the property. The hotel currently has 80 rooms.

New construction

The accounts of the Bank of Ceylon make no mention of the profitability of the hotel but the fact that the bank prefers to use a substantial part of the building as an office rather than run it as a hotel indicates that the hotel is not the bank’s priority, quite rightly so. Should it be the priority of the state?

The hotel caters mainly to foreign tourists but provides restaurant and banqueting facilities that are utilised by citizens. There is no shortage of hotel rooms in Colombo, indeed with all the new construction taking place there are even fears of a glut of rooms in a couple of years. There are plenty of other hotels and restaurants that citizens can avail themselves of in the city so if they so desire.

Is there an essential public service that is being provided by the state owing and managing this hotel? A small part of the population does utilise the hotel but relative to the overall population it is miniscule. As they do so on normal commercial terms and there are plenty of alternatives available transferring this to private hands will have no impact on public welfare.

Similar arguments apply to the Hilton Hotel, Waters Edge and the Hyatt.

The Hilton was expropriated in 2011 under a dubious piece of legislation, the Revival of Underperforming Enterprises and Underutilised Assets Act. It continues to run as a hotel under state ownership.

Water Edge was a private project, built on state land sold under controversial circumstances and re-vested in the government by a court order. Originally set up as a golf club it now functions as a restaurant/reception hall.

The Hyatt Hotel is still under construction. This ended up in state hands as when the Ceylinco Group which owned it collapsed and was bailed out by the government.

Private ownership

A hospital is of greater public interest, in terms of welfare than a hotel.

Lanka Hospitals was a private hospital that was acquired by the Sri Lanka Insurance Corporation (SLIC) when SLIC was in private hands. SLIC reverted to the state after the Supreme Court ruled against its privatisation in mid-2009, leaving Lanka Hospitals in state hands. Lanka Hospitals continues to function like a private hospital, charging fees and does not come under the purview of the Health Ministry (being run by the UDA). The state runs free healthcare services but state ownership of the commercially run Lanka Hospitals had no discernible impact either for good or ill on public health, therefore there can be no serious concerns in returning this to private ownership.

In terms of public impact, cooking gas is of the most significance. According to the Household Income and Expenditure Survey of 2013 about 54.7% of urban households use gas for cooking (although islandwide only 18.5% of households do). How will the sale of Litro Gas affect the public interest?

Fortunately we have a benchmark to assess the possible impact of privatisation since Litro Gas was previously in private hands. The government owned the gas distributor but it was sold to Shell in 1995. The period of private ownership saw an improvement in service. Frequent shortages of gas and the lack of cylinders which plagued the service disappeared.

In 2001 the government allowed a second private player to enter the industry which has improved service further: online ordering, home delivery, more convenient packaging and energy audits for industrial customers have materialised. All this would have been quite unthinkable under the old pre-1995 state monopoly. When Shell decided to pull out of Sri Lanka the Government bought it back. Since the renationalisation in 2010 the state has managed to maintain the standards set by Shell but there has been no visible improvement under state ownership.

The introduction of private players to the distribution of fuel (LIOC) and the commercialised distribution of electricity (through LECO) also resulted in improved customer service. Any industrial customer who has attempted obtain a transformer will testify to the ease with which it can be done with LECO, as opposed to the bureaucratic stonewalling that one faces with the CEB.

The lesson therefore is clear – service, therefore public welfare will increase when consumers are given a wider choice. When they have alternatives to turn to businesses are forced to improve services. The previous experience under Shell supports this case and the government should not hesitate to sell a 51% stake Litro Gas.

They should then follow through with selling the rest to the public and listing the entity on the stock market which will improve transparency and therefore accountability. The Government should also grant further licenses to allow other distributors of cooking gas to enter and improve consumer choice even further.

Ravi is a fellow at the Advocata Institute.