Why SriLankan hasn’t aged well

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 Nishtha Chadha

A 2019 poll commissioned by the Advocata Institute found that 81% (Sparkwinn Opinion Poll April 2019. Sample size of 855 participants.) of surveyed Sri Lankans did not believe that the services provided by state-owned enterprises (SOEs) were worth the financial losses incurred by them. Spanning eight provinces and 18 districts, the poll revealed an overwhelming dissatisfaction amongst citizens of all ages and income demographics about the continued use of state funds to bail out loss-making SOEs.

SOEs such as SriLankan Airlines continue to remain some of the largest burdens on Sri Lanka’s already debt-ridden Treasury. While it is a no-brainer that public expenditure should be representative of public interests, there is a severe misalignment between public priorities and government expenditure in Sri Lanka. The above poll results show quite clearly that the public has no interest in bankrolling loss-making SOEs that offer minimal public benefit, but the Government continues to actively support them. Funds wasted on SOEs could easily be redirected to essential public services and institutions, such as healthcare and education, to make real improvements to the everyday lives of Sri Lankans. Instead, exorbitant taxes and low-quality public services have become a staple of Sri Lanka’s public sector, serving the personal interests of corrupt politicians over the legitimate needs of the wider public.

Siphoning taxpayer money

This week, SriLankan Airlines celebrated 40 years since its first flight in 1979. Hailed for its “service to the nation”, the airline has certainly become a hallmark of Sri Lanka’s tourism industry. With an impressive network of 109 cities in 48 countries, SriLankan Airlines Group CEO Vipula Gunatilleka states that the airline’s objective now is “to become the most customer-centric airline in Asia, both in the air and on the ground, building on our four decades of excellence in customer service for which we have won numerous international accolades with our emphasis on safety, punctuality, and service.”

But with the accumulation of Rs. 17.2 billion in net losses for the year 2018, it has become prudent to ask the question: What part of the nation is this airline really serving?

Much like its other state-owned counterparts, the SriLankan Airlines enterprise has become a rampant vehicle for corruption in Sri Lanka’s public sector. A 2018 special report on the airline by the Auditor General’s Department found various accounts of malpractice across the enterprise, including:

• Failure to follow procurement guidelines in the selection of consultative companies

• Failure to introduce formal control systems for the implementation of plans

• Lack of proper cost-benefit analysis in validating expansion of the fleet of aircrafts

• Failure to conduct proper analysis on the method of selection for acquiring aircrafts

• Failure to follow government procurement guidelines in the acquisition of aircraft

Simply put, this suggests a complete lack of accountability within the company. There are few, if any, checks and balances in place to monitor spending, and transparency is scarce. This makes it extremely difficult for the general public to hold managers and public officials to account, despite technically being the owners of the enterprise.

The airline has thus managed to squander a loss of Rs. 58.7 billion of public funds for the past three years. What seems most outrageous about the scale of public expenditure on SriLankan Airlines is the fact that most of the citizens funding these losses will never even get the chance to sit on a SriLankan Airlines flight in their lifetime. As the owners of the enterprise, the public deserves a much larger say in where their money is going.

The airline has thus managed to squander a loss of Rs. 58.7 billion of public funds for the past three years. What seems most outrageous about the scale of public expenditure on SriLankan Airlines is the fact that most of the citizens funding these losses will never even get the chance to sit on a SriLankan Airlines flight in their lifetime

There have been various justifications for the State’s continued commitment to fund these losses, such as the need for capital expenditure to reverse losses and keep the airline internationally competitive. However, evidence suggests that even with the billions of rupees of taxpayer investment, the enterprise is actually becoming increasingly uncompetitive. In 2011, SriLankan Airlines was ranked 52nd globally in the Skytrax World Airline Awards, but today, it does not even rank within the top 100.

What’s the alternative?

Looking at recent years, 2008 stands out among the losses. In this year, SriLankan Airlines enjoyed a net profit of Rs. 4.4 billion. What was different? The airline was running in partnership with Emirates, which had a 40% stake in the company at the time. Emirates was contracted to manage the company for 10 years and completely overhauled the company’s infrastructure and operations to build it into a profit-making enterprise.

However, in 2008, the Government took back sole ownership of the airline after tensions broke out between the Chief Executive and the Sri Lankan Government over the refusal to bump 35 passengers from a full London-Colombo flight to make way for the Sri Lankan President and his entourage (10). From this point onwards, the losses incurred by the airline skyrocketed.

This is an explicit example of why the government should not be running state-owned enterprises. The endemic conflict of interest between players and regulators creates a dangerous breeding ground for malpractice, with taxpayers paying the ultimate price.

SriLankan Airlines’ experience with Emirates has shown the marked benefits of private management, and should serve as a model for future SOE reforms. While partial privatisation can certainly put an end to poor management practices and restore the profit-making capacity of enterprises, the risk of political interference remains pervasive.

Thus, if the Government is to put an end to the enormous burden that loss-making SOEs currently place on the Sri Lankan public sector, it needs to actively pursue avenues for full privatisation while bolstering its role as regulator.

Privatising SOEs will not only allow for better management and increased public expenditure on essential services, but also restore competitive neutrality to the airline business, making air travel more affordable for all Sri Lankans.

Taxpayers should not be spending their hard-earned money on rescuing failing government enterprises with poor management practices. It is high time the Government took a hard look at what the people want and fulfilled its mandate as a representative body. SOEs have become a vehicle for corruption in Sri Lanka’s public sector, and clearly, Sri Lankans are tired of paying for them.