THE STATE OF STATE ENTERPRISES IN SRI LANKA – 2022

As a group, these SOEs have suffered large losses that have contributed to the present macroeconomic problems facing the country. The state has to make good on these losses, increasing public deficits that have to be financed by borrowing from the Central Bank, has exacerbated this issue further, which has brought high inflationary pressures into the economy. Losses of these enterprises contribute to macroeconomic instability given the perilous state of our overall finances. The Ceylon Petroleum Corporation, Ceylon Electricity Board and SriLankan Airlines need immediate reform or sale to a private party to arrest the growing magnitude of this problem. Previous attempts to address this problem have attracted controversy. Our general population is not prepared to allow disposal of enterprises despite their record of making large losses year after year. Apart from the macroeconomic problem, the country has a large productivity and efficiency problem that requires more resources to keep growing even at the same rate given that productivity and efficiency issues have not been addressed adequately.

Advocata's 2022 Report "State of State Owned Enterprises 2022 " is a deep dive on the impact of State Owned Enterprises, on Sri Lanka's economy.

Advocata SOE Reform Roadmap : Getting the State Out of Business: The Compelling Case for Privatisation of State-Owned Businesses

Sri Lanka's state-owned enterprises (SOEs) are a major hindrance to the country’s economic prosperity. The state's footprints extend across all major industries - telecommunications, banking, ports, petroleum, and power generation. With over 400 SOEs spread across 33 sectors and employing roughly 250,000 workers, they form an inefficient, bloated bureaucracy. The IMF's Governance Diagnostic Assessment flags SOEs as being high-risk for corruption, plagued by weak management, shoddy oversight, rigged procurement processes, political interference, and a lack of transparency. Sri Lanka cannot afford the status quo. Decisive action to privatise SOEs is essential to break free from the cycle of inefficiency and corruption, and unlock sustainable economic growth.

Here is the link to the Advocata SOE Reform Roadmap in English on

Getting the State Out of Business: The Compelling Case for Privatisation of State-Owned Businesses

Here is the link to the Advocata SOE Reform Roadmap in Sinhala

Here is the link to the Advocata SOE Reform Roadmap in Tamil

Survey reveals that 81% of Sri Lankans claim that state enterprises do not provide enough services to justify losses

Advocata Research Analyst, Aneetha Warusavitarana was featured on News 1st’s Prime Time English News where she explained the findings of Advocata’s latest public opinion poll on State Owned Enterprises.

855 respondents across 8 provinces were asked the question “Do you think the losses sustained by state enterprises are justified given the services they provide?” To which, 81% answered “No”.

Ability of Parliamentary Committees questionable – Advocata

Republic Next mentioned Advocata in a recent article on misgovernance of SOEs in Sri Lanka.

The Advocata Institute, a Colombo-based think tank, is questioning the ability of various oversight committees set up by Parliament to look into governance issues in Sri Lanka.

The report, which looks at the State Owned Enterprises (SOEs), is highly critical of these institutions that are draining the Treasury of billions of rupees each year.

Advocata says the way Members of Parliament are elected is an issue. MPs align with wealthy election backers who provide campaign support in return for political protection or rewards. Thus, those elected are politicians with “access to cash and manpower – not intellect or ability.”

Although politicians will pursue their own interests, an effective governance system should apply the brakes on the worst of those impulses. Parliament, through the aforementioned committees, should be doing this, but is seriously underperforming, the report says.

Although Parliamentary Committees such as the Committee on Public Enterprise (COPE) and the Committee on Public Accounts (COPA) conducted investigations that shed light on important issues – including the much talked about Bonds Scam – Advocata says these committees could do more to scrutinise public funds. These committees do not appear to have sufficient expertise to make concrete recommendations to right the wrongs in Government.

The report notes that “serious deficiencies exist.” With the current political uncertainty, it says that “engineering crossovers in return for political office reduces parliament to a rubber stamp and the committee system is weak.” The report commends the current government for the major overhaul of the committee structure, which it says makes them “much better geared to scrutiny and accountability.”

Structures aside, the report says that the performance of these committees depends on the calibre of the MPs.

Advocata recommends that experts who are not MPs be added to these committees so that they could function better. “Unfortunately, it does not seem as if we have the necessary quality of MPs in sufficient numbers to make the reformed system perform. Aside from capacity, there is little incentive for MPs to take committee work or parliament seriously. Many don’t even attend,” it says. Publicly available information shows that less than half the MPs attended at least 75% of the sessions. Even those who attended remained in the house only for the first hour.

Advocata also found that “COPA/COPE are under-resourced; their reports complain of a lack staff (particularly audit) and proper IT systems. Further, the government is not required to respond to the recommendations of these committees within any stipulated period of time, leaving the accountability loop open.” Advocata also adds its voice to the clamour to make the COPA and COPE hearings open to the media.

The picture that emerges from the Advocata report is bleak. It concludes that the “political process incentivises corruption. A weak governance regime means there is little accountability and few checks on government spending. In addition, limited technical capacity means policy is open to “capture” by special interests. The combination is deeply dysfunctional: a parasitic system that transfers wealth to the politically connected through corruption and rent-seeking.”

Download full report: https://www.advocata.org/state-enterprise-srilanka

Corruption and patronage culture rampant

Republic Next mentioned Advocata in a recent article on misgovernance of SOEs in Sri Lanka.

State Owned Enterprises (SOEs), which have cost the state mammoth amounts of state funds over the past few decades, are victims of a patronage culture fostered by corrupt politicians, says a new report on the state of these organisations released by Colombo-based think tank Advocata.

The report quotes Finance Ministry Secretary Dr R.H.S. Samaratunga as saying that successive Sri Lankan governments have pumped a colossal Rs.1, 150 billion into the upkeep of these SOEs up to 2017.

This is money that could have been spent on developing schools and hospitals as well as maintaining much-needed infrastructure.

The report says that lifting limits on political campaign spending and abolishing transparency of those money trails in 1978 opened the floodgates of corruption.

The report points out that “wealthy backers, some connected to the underworld, provide labour and fund campaigns in return for political protection or rewards.” Because of this culture, the people who end up getting elected to office are those with “access to cash and manpower – not intellect or ability.”

Naturally, this means that the state’s technical capacity to formulate policy and implement them are insufficient. The report notes that “the concept of independent policy analysis does not exist, leaving a vacuum vulnerable to capture by special interest groups.”

After the Member is elected, they try to recover their “investment” in the political venture or start building up a war chest to be re-elected. He or she also has to provide jobs and wherewithal to their supporters and for this, SOEs provide opportunities for the politicians to stuff these enterprises with staff that exceed requirements. In one egregious incident, the State Engineering Corporation recruited a mind-blowing 451 persons to fill 41 vacancies in December 2015. That is more than ten times the required number of persons, according to inquiries conducted by Parliament’s Committee on Public Enterprise (COPE).

The reason why the SOEs are a soft target for the corrupt is weak governance practices, the Advocata report says.

The report suggests that adopting “comprehensive corporate governance practices is a route that many countries have taken to strengthen the accountability of SOEs. These governance practices strengthen the governing bodies that oversee and control (shareholders or owner meetings, board and management, internal monitoring structures), define clear rules of engagement between the different actors, and increase transparency and accountability towards the stakeholders.”

Download full report: https://www.advocata.org/state-enterprise-srilanka

Ignorance and corruption bedevils state enterprises

Republic Next mentioned Advocata in a recent article on misgovernance of SOEs in Sri Lanka.

The Sri Lankan state does not know how many enterprises it runs, reveals a report on State Owned Enterprises (SOEs) released by the Colombo-based think tank Advocata.

Titled “Sri Lanka’s state-owned enterprises Systemic Misgovernance: A discussion”, the report delves into the state of these organisations and proposes policy reforms to improve governance.

In the foreword, the researchers point out that a “major roadblock identified in the report is the lack of an official, all-encompassing list of SOEs, their subsidiaries and sub-subsidiaries. The Advocata Institute has found references to over 400 SOEs, but this cannot be verified against any government source.” The Department of Public Enterprise has the most comprehensive list, consisting only 127 SOEs. Some 50 of these SOEs are considered “strategic” and are closely monitored by the Treasury.

The report also found that enumerating SOEs was problematic and says “this problem is compounded by the fact that the government has a very loose definition of SOEs. To address the problem, this report provides a working definition of what an SOE is, for the sake of clarity.”

The report goes on to explore the structural issues at the core of Sri Lankan SOEs. Elaborating on these issues, the report illustrates how structural issues lead to poor governance, which allows SOEs to continue to function as loss-making entities.

The report points out that unlike private enterprises, SOEs are run with taxpayer money and when they incur losses, the Government – or in effect the taxpayer – has to pay for it. Because of this, SOEs are a drain on the Treasury.

Mismanagement and outright looting bedevils these enterprises as they are crammed with workers who are supporters of politicians and not staffed with professionals who could make them efficient and profitable, the report finds.

“SOEs are ultimately owned by citizens but run by managers who are controlled by politicians. Politicians determine or otherwise influence the appointment of key management and must hold the managers accountable”, the report adds.

The report compares SOEs to private sector companies, where shareholders have invested their own money in a venture. “Unlike shareholders, the politicians have not invested their money in the business. As they have no stake, there is no particular interest in ensuring it is well run. However, politicians do have incentives to direct SOEs to achieve economically inefficient objectives for political purposes, giving rise to political costs. These may be benign if policies enhance social welfare at the cost of shareholder value. However, more often than not, they are malign and favour political allies at the expense of public welfare”, it points out.

Download full report: https://www.advocata.org/state-enterprise-srilanka

Should we privatise State Owned Enterprises?

Advocata Resident Fellow at the Advocata Institute,  Ravi ratnasabapathy appeared on the nationally televised Face the Nation to speak about reforming State Owned Enterprises in Sri Lanka and particularly the fate of the troubled SriLankan Airlines.

Privatization & Public Private Partnerships Of SOEs In Sri Lanka

Arundathie Abeysinghe writes on Colombo Telegraph on SOEs In Sri Lanka,

In many Asian countries including Sri Lanka State-owned Enterprises (SOE) continue to control vast swaths of national Gross Domestic Product (GDP) with the state as their biggest share holder. As such, they control about 1/3 of total enterprise assets and SOEs are larger than their non-SOE peers. There is a great variety among Sri Lankan SOEs. Meanwhile, SOEs in the sectors that are monopolized by the state yield good income and profitability, while those that are not supported by the state record poor performance. To better understand the profitability of Sri Lankan SOEs, a deeper analysis should be done by looking into individual sectors.

Shares of SOEs in different sectors are diverse. The majority of SOE profits are contributed by sectors that are monopolized by them, whereas, sectors which are dominated by non-SOEs are major sources of non-SOE profits. The majority of the SOE profits are contributed by state-monopolized sectors and such SOEs record a respectable rate of return.  At the same time, profitability of SOEs in sectors with less state domination is much poorer.

According to the Treasury Annual Report 2014, at present Sri Lanka possesses 245 State Owned Enterprises (SOEs), of which 55 have been identified by the General Treasury as strategically important SOBEs under the clusters of Banking and Finance, Insurance, Energy, Ports, Water, Aviation, Commuter Transport, Construction, Livestock, Plantation, Non Renewable Resources, Lotteries, Marketing & Distribution, Health and Media.

Read The entire article on Colombo Telegraph

Opinion - Sri Lankan Airlines, sour or to sour?

J. Lorenz writes on Lanka Business Online, about Sri Lankan Airlines:

"Although the government inherited a profitable business in 2008 they successfully managed to run it into the ground due to mismanagement and corruption. The two explanations available are the Jensen and Meckling (1976) theory of ‘principal-agent problem’ and the free-rider problem, both of which concern self-seeking individuals, as discussed at the launch of Advocata Institute at the Lakshman Kadirgamar Institute earlier this month.

Managers of state owned firms are aware that salaries would be paid regardless of performance of the company hence motivation to perform is taken away thereby embodying the free-rider problem. Further, tax-payers would continue to pump money into failing SOEs whereas a private company would pump their own money into the business risking everything, hence increasing the commitment to perform well. The budget funds given to SOEs in 2014 is equivalent to every household paying 24100 rupees to keep SOEs afloat. This is while around 40% of Sri Lanka’s households earn less than 24000 rupees a month"

Read the entire article on LBO

Advocata report used on televised debate

Advocata Institute’s inaugural report on The State of State Enterprises was used by Deputy Minister of State Enterprise Development as well as the Deputy Minister of Foreign Affairs on a nationally televised debate on Hiru TV’s Balaya program.