The case for privatisation

Originally appeared on The Morning.

By Dhananath Fernando

Privatisation has entered the lingo of the nation once more. A few years ago, the mere mention of it was taboo in many circles and although the fear of using the word hasn’t fully evaporated, an increasing number of people actually understand the concept today. 

The discussion is now drifting towards whether privatisation is good or bad, with those proposing privatisation highlighting examples of success stories while those against it bring up examples of where it has gone wrong. 

In my view, rather than debating the merits of privatisation right away, the starting point of the discussion has to be about what Sri Lanka can do to overcome the crisis and how to transform our little island into a dynamic economy in Asia. 

On our journey to find answers, we can consider many options, of which privatisation is definitely one. However, our starting point has to be getting Sri Lanka out of this mess and our solutions have to be pragmatic and suited to our context. 

It is the same as a doctor prescribing medicine for ailing patients. The doctor first performs a diagnosis and then recommends medication based on the patient’s condition, history, affordability, side effects, and many more; he does not begin debating the merits of a particular treatment without a thorough diagnosis.

Obstacles against reforming the State sector

There is a brewing school of thought in Sri Lanka that given the many public corporations well-operated by honest and honourable professionals in other countries, nothing stands in the way of Sri Lanka having the same. The oft-cited examples include Singapore and New Zealand. 

Firstly, we have to realise that Sri Lanka’s context is very different. We are a country whose political system is rotten to the core. In fact, when President Gotabaya Rajapaksa took over the office of the president, he appointed a committee to appoint directors to State corporations and we are all aware how that ended. 

Simply put, our political system and context doesn’t facilitate getting talented professionals for the management of State-Owned Enterprises (SOEs). 

Secondly, the vast majority of capable professionals in Sri Lanka are very well compensated and taken care of by the private sector, so they have no reason to move to the public sector, which would come with a massive risk of political backlash and less pay to boot. Salary scales in our SOEs simply do not attract the right talent to drive management change. And that’s just one side of the story. 

Thirdly, Sri Lanka is now unfortunately bankrupt and most of the key SOEs carry both massive debts and losses. We cannot realistically expect the right talent to join and transform SOEs, knowing they will be faced with a difficult restructuring and turnaround, particularly without even the incentive of competitive salaries. 

Last but not least, there is a principal-agent problem when the State attempts to conduct business. The State is currently involved in many industries as botha  regulator and a market player. Can you imagine if the umpire in a game of cricket was also a batsman for one of the sides? 

The State is involved in a multitude of sectors including hospitality, aviation, modern trade, banking, energy and many more. Although it has a bigger role in establishing the rule of law and a competitive marketplace, it is instead wasting resources on micromanaging certain industries. 

The State is presently a jack of all trades and master of none, falling far behind expectations both in terms of ensuring the rule of law and managing business. 

Privatisation as a viable option 

It is in this context that Sri Lanka has to consider privatisation – not simply for the sake of privatisation but as a solution for the problems we have. There are six basic reforms that we have to implement if we wish to emerge from this crisis in a timely fashion.

• Increase revenue

Privatisation can increase revenue because private companies pay taxes to the State. At present, rather than receiving taxes, the Government finances a number of heavily loss-making institutions. When undergoing privatisation, the government earns money from the assets it sells, so on both ends it will bring revenue for the Government to overcome the crisis.

• Reduce expenditure

Currently, the Government’s main expenditure is on SOEs. The Ceylon Petroleum Corporation (CPC), for example, has lost Rs. 600 billion in four months. SriLankan Airlines has lost Rs. 200 billion in four months, an amount that is four times the entire Samurdhi budget (Rs. 50 billion), which is used to take care of the most vulnerable people in our society. 

When we privatise, our expenditure will fall and we will stop leaking money, whereupon those savings can be given to the most vulnerable.

• Reduce debt

SOEs not only increase expenditure and burden State coffers – they carry a lot of debt in both LKR and USD. The Central Bank Governor recently stated that the CPC had neither USD nor LKR to run its operations and that the Government had to finance it. Privatisation will reduce our current and future debt burden, which will help restructure our debt and achieve debt sustainability. 

• Increasing growth

Another important aspect of overcoming the crisis is to create growth. The current set-up of retaining State ownership of these loss-making and inefficient enterprises will simply slow down growth. 

Consider the example of the East Container Terminal. Multiple tender proceedings were stopped and cancelled but the Government was still said to be capable of seeing it through. However, it is now obvious that this is not possible given the crisis. 

Moreover, not only are we behind, but we are also losing container transhipment due to capacity constraints while business is moving away from the country, challenging our long-standing transhipment status. 

However, the private sector can drive growth. They have cash, and to an extent, lending capacity. The private sector is more concerned about profits, not so much about the overall economy of the country.  

• Increasing productivity

We all are aware of the productivity figures of State-managed institutes. News reports revealed that even with fuel shortages, the CPC had paid a total overtime pay amounting to billions of rupees. 

The private sector can drive productivity. It can introduce technology, processors, business ecosystems and networks to create synergies, which will create job opportunities and drive productivity across the nation. 

• Attracting FDI

The private sector, locally and internationally, can bring investments to our shores with privatisation (meaning US Dollars) in addition to technology and skills which will spill over to other sectors, driving productivity and efficiency. Foreign Direct Investments (FDIs) will undoubtedly ease the pressure off the Government in relation to USD shortages. 

Case-by-case basis 

Thus, privatisation suits Sri Lanka based on the crisis and context. It is a solution for what we are going through and a medication that fits the condition of the patient. 

However, this doesn’t mean we have to privatise everything. Energy and electricity have to be unbundled first and the market must be made competitive. The pressure on the Ceylon Electricity Board (CEB) and the CPC will ease and consumers will have a better experience. 

Some institutions such as SriLankan Airlines have to go for a fire sale, while some institutions can be consolidated and some can opt for public-private partnerships. There is no single remedy for all, but we have to move forward on a case-by-case basis. The important thing is to move forward and for the State to slowly move away from doing business, instead focusing on the Judiciary and the rule of law. 

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.