Two ways the private sector has failed Sri Lanka

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 Dhananath Fernando

There are two main models of growth and development, which have been discussed and used interchangeably. The state sector-led development model where the government maintains a fair share of businesses by expanding the state footprint is widely popular in Sri Lanka. The second model is a private sector-led model where private enterprises and individuals are provided the opportunity to lead growth and development. Interestingly, the state sector-led model doesn’t rule out the engagement of the private sector. Having a conducive environment for businesses, a high-doing business index, and maintaining a business-friendly environment have always been part and parcel of the promises made by political leaders including ideologues who favour a state sector-led model.

The state sector

In any business model, the main factor is “ownership” or the incentive to have ownership. Ownership comes in different forms, but in business, it is associated with risk. The higher the risk, the higher the gain. The person who risks their money, reputation, time and any form of capital has a natural incentive to recover it or make a benefit out of it. In private business, the individual or the shareholders have risked their private money (property) in the business, so they are psychologically driven to perform well, supervise their teams, recruit cutting-edge talent, and delegate responsibilities with the objective of growing together.

In the state sector, it’s different. The people who manage the specific organisation haven’t really invested any risk. They are just managers and responsible officers. So even if the business/organisation performs well or not, it hardly has any impact on them personally. They will not lose any private property or anything personal in the state sector business model. Instead, in a private sector investment, the investor and the person who takes the risk have so much to lose. In the state sector-driven model, the main source of money is taxpayer money, which was collected at different stages of the economy through imports, income, profit, etc.

As per the Sinhala folktale and anecdote, The Porridge Pot of Seven Villagers (aadi 7 denaage kanda haliya), no one is responsible for anything and everyone assumes the other person will perform. Ultimately, no one performs. When no one takes the responsibility, gaps are created for corruption. The question then arises: Without ownership or stake in your private property, why should someone take the risk of blocking corruption?

It is generally discussed that bribes are a necessity to be paid at all levels of a project/investment or else the project will be blocked at each stage from approval to functioning. This is a good example of the window for corruption that is caused by a lack of ownership. This is the inherent problem in the state sector model and the reason for its inability to improve productivity and efficiency.

Many Sri Lankans are of the view that the private sector running a business is equal to common people losing access to their common public property. A slightly different sentiment which is very deeply rooted in society is that when the state runs the business, it is more people-friendly and that prices tend to be more reasonable.

Also, government jobs are very popular during election times across all voters. Someone with basic mathematics can understand as to how unsustainable our state sector and state-owned enterprises (SOEs) are. According to the recent report by the Labour Department (1) (May 2020), about 1.2 million people work in the state sector. In addition, our SOEs are making eye-watering losses. According to the Committee on Public Enterprises (COPE), the total loss suffered by SriLankan Airlines from 2009 to 2019 sums up to about Rs. 240 billion (2), exceeding our expenditure on Samurdhi, our main social security programme for the poor, which is about Rs. 94.7 billion (3).

The private sector

While our state sector has really brought us to our knees, our private sector performance has been equally bad. There are about 3.4 million private-sector workers in Sri Lanka and another 2.7 million are own-account (self-employed) workers. More than 200,000 are employers. The private sector failed Sri Lanka miserably by adding burden on two fronts. One by burdening the common Sri Lankan by blocking the opportunity to consume good quality, reasonably priced, and competitive goods and services by hiding behind high import duties and adding most of the product categories into the negative list. When you impose a higher import duty for a consumable good, it increases the price of that respective product, making it impossible to compete in the local market.

As a result, consumers only have the choice to buy locally manufactured goods and services. Buying locally manufactured goods and services benefit these respective companies and local entrepreneurs. This can be argued as a good thing, but earning a profit by avoiding competition from the global stage and adding an additional cost to the Sri Lankan consumer to pay for the extra inefficiencies is unjustifiable. Instead, most in the private sector should be able to compete with global products by increasing their efficiency and productivity, rather than hiding behind government protection.

Below are some import protections and the numbers are extremely high. How can we justify an extra protection tax of 26.6% on a pair of school shoes, a protectionist tax of 19.6% on construction steel, and 53.62% on floor tiles and wall tiles in a country where the mean household income per month is Rs. 62,237 (4)?

Secondly, some businessmen are dependent on government contracts and licenses, creating an environment of symbiosis for corruption between politicians and the business community. Today, this has become a practice from national level to the local government level, and this is the private sector’s main contribution to taking mother Sri Lanka backwards. To keep this level of protection by higher import duties, most of the senior businessmen have to align with political powers. Even if Sri Lanka is to continue down the path of import substitution, our local products have to be competitive for this policy to succeed.

At the national level, high-level agreements, contracts, tax holidays, moratoriums, and loan reliefs have been provided by each government to their connected business circles. Instead of competing with technology and skills (except for a few players in apparels, rubber, tea, IT, and services), most business leaders have compromised their ethics, modesty, accountability, and genuineness over quick and short-sighted profit margins by avoiding competition at the global level. As a result, Sri Lankans have to pay the price for our domestic inefficiency, while the economy has become uncompetitive and irrelevant to global markets.

Some businessmen went a further mile to establish monopolies while hiding behind high import tariffs. Most of these private-sector monopolies rely on unethical business practices, giving rise to multiple situations of conflict of interest. They have pressured small players and have bought them over by unethical tricks or sometimes the use of power, rather than setting an example for Sri Lanka by empowering our youth to compete for ideas at the global level. Sri Lankan businesses have decided to remain isolated, being planted while isolating our consumers from access to world-class products that would improve their living standards significantly. Some Sri Lankan micro, small, and medium-scale businesses have been hindered from accessing world-class raw material and ingredients.

Another set of businessmen have been arguing on the need for global competition to all industries, except to the industry they are operating based on baseless excuses. One common argument is that the industry is at an infant stage, so they expect import tariffs or types of protectionism. But most of these industries are far from the infant stage. They have been in operation for more than a few decades.

The companies that were open for competition and competitiveness excelled and they extended their business to other parts of the world like India, Bangladesh, and Africa. This fear of competition in the vast majority of Sri Lankan businesses is one reason why Sri Lanka could not become a breeding ground for world-class businesses and have failed to operate beyond this tiny island. So now we have an extremely tail-heavy inefficient public sector and an equally protectionist political party-aligned business sector making all Sri Lankan’s suffer.

The solution for this is not moving back to the state-led business model, but to have an open mind to be open for competition. Till we reach that state of mind, Sri Lanka will suffer economically and continue to be irrelevant in global markets, while more graduates and youth will gather on our roads requesting more government jobs.

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.