Prioritising SOE bill over OSA: A shift in economic direction

By Dhananath Fernando

Originally appeared on the Morning

While the Government has prioritised the Online Safety Act (OSA), which is extremely negative for our economy, there are other bills in the line-up which are expected to get through. One such bill is on the State-Owned Enterprise (SOE) holding company.

The SOE Restructuring Unit (SOERU) has outlined the principles of SOE reforms, which are in the right direction, but the Government’s prioritisation of bringing the OSA is definitely in the wrong direction.

Key principles

While the bill on the SOE holding company is yet to be released, the SOERU has outlined nine key principles on which they expect to base the SOE reforms. In the first principle it admits the Government has no role in commercial activities except for three instances.

(1) If there is a concern on national security, the Government can engage in business.

(2) If there will be no private participation in certain industries given the size of our market, the Government can engage in business. For instance, if we open the rural bus routes for the private sector, there may be a possibility that, given the nature of the low population density, no private bus operator will be interested in entering the market. While it can be to an extent addressed through allowing to charge a higher price and the Government providing a direct cash subsidy to the citizens in the rural area, there can be practical challenges. In that case the SOERU principals have left the space for the Government to enter business.

(3) If the service from the Government is essential in nature but if the regulatory mechanisms are weak for competition, where there is opportunity for market exploitation by the private sector, the Government can be in the business.

While the three areas are logically right, we have to wait for the final bill to see how exactly this has been worded. The danger is that governments are so powerful that even in the above three areas, it can leave a lot of room to keep a lot of existing SOEs under the government of the day if the political ideology is to keep SOEs, claiming it is under national security.

In the Right to Information (RTI) Act, there is provision that the authority can decline to disclose the requested information if it threatens national security. For most RTI requests, many Government institutions have been responding that the information cannot be disclosed due to national security reasons. Therefore, defining national security or the process of deciding how an organisation or industry comes under national security is important.

Unless the Government can always build a logical stand, even institutions like the Cashew Corporation will have to be under the Government as it can impact national security.

On the second condition, that in the absence of a private player due to limitation of the market size or another criterion for a service that is essential in nature, the guidelines have to be developed in the case of what could be a new player wanting to join the industry later.

For example, it could be an industry with high capital investment and low market penetration, making Sri Lanka unattractive at the beginning due to the market size. As a result the Government can be in that business as the service is in the nature of being essential.

But over the years as technology and other parameters develop, at one point there may be new players interested in joining the industry. At that point, a natural resistance may occur from the SOEs over a new entrant being in the market as they will lose their monopoly status. The same happened when Lanka IOC entered the market and still there is some resistance to the entrance of Sinopec and other players in the energy market.

Deciding what an essential service is also requires a framework. Otherwise, when a government wants to be in a business, it can easily announce that industry as an essential service and enter the business, bringing forth various reasons.

All of the above are beyond the scope of the SOE law, but we need to keep in mind that these are the loopholes governments always have when ideological stances are different. Even if the new bill passes, we should not underestimate the skills of policymakers in finding the loopholes.

Other principles

The fourth principle of the SOE holding company is to bring all SOEs under one registration format. At the moment, different SOEs have different structures with a very high degree of complexity. For instance, the railway is a commercial activity and runs as the ‘Railway Department,’ while the Ceylon Electric Board runs as a board under an act. Meanwhile, Lanka Hospitals is a hospital but operates as a private limited company. Therefore bringing them all under one registration is vital when we set up the SOE holding company.

The fifth principle mainly focuses on the governance of SOEs as the SOE reform process is a longhaul game. The SOE holding company and the subsidiaries are required to adhere to Colombo Stock Exchange guidelines. This includes releasing quarterly financial statements and the board of directors being required to conform to the Code of Best Practice on Corporate Governance.

The other principles in the list are on unbundling the regulator and the operator in certain industries. There are industries run by the Government where the Government is a player as well as a regulator at the same time.

Overall the SOERU’s principles to base the SOE holding company is in the right direction, although there is always room for politicians to exploit the principles.

It is sad to see the pushing back of such important SOE holding company legislation over the draconian Online Safety Act.