STATE SILVER UNDER THE HAMMER

Fazmina Imamudeen critiques SOE privatisation ahead of the election season

Sri Lanka is dealing with the dual pressures of an economic crisis and forthcoming elections. Central to this eventuality is the debate over privatisation of state-owned enterprises (SOEs), which has significant implications for the country’s economic stability and public welfare.

The nation’s financial challenges have heightened the urgency for economic reform. And the government’s push for SOE privatisation is seen as a crucial step towards alleviating the country’s fiscal burdens and improving efficiency in these public enterprises.

Concerns have been raised about the pace and direction of SOE reforms – particularly in light of forthcoming elections.

Richard Walker – the World Bank’s Senior Country Economist for Maldives and Sri Lanka – highlights the need for improved governance and transparency in these SOEs prior to considering privatisation.

He warns against rushing decisions due to the risk of ‘reform fatigue’ and potential policy reversals post-election. His remarks affirm that effective reforms require a robust framework for governance and options for private participation.

The World Bank is advocating for a series of measures leading up to privatisation, beginning with transparency and performance improvements in Sri Lanka’s SOEs.

These enterprises have long been plagued by inefficiencies, fiscal burdens and poor governance. Though the government has identified 52 such key entities for the slate, the total number of SOEs ranges from 300 to 500, which is a reflection of information gaps.

Mismanagement and a lack of transparency are pervasive; they perpetuate corruption and weak corporate governance.

Despite two previous waves of privatisation from the late 1980s to 1994, and between 1995 and 2004, SOE reforms have generated limited traction. Effective reforms demand accountable and inclusive political and economic institutions, strategic public messaging, transparency, competition and solid regulation.

Recent restructuring efforts include the establishment of the State Owned Enterprise Restructuring Unit (SRU) and approval of an SOE policy with nine guiding principles, which is being converted to the Public Commercial Business Act.

A state holding company modelled on Singapore’s Temasek is being developed to manage and govern retained SOEs. Meanwhile, the Ceylon Electricity Board (CEB) and Ceylon Petroleum Corporation (CPC) are undergoing restructuring processes focussed on unbundling, competition and regulatory separation.

The government plans to privatise eight SOEs including the Grand Hyatt Colombo, Hilton Colombo and SriLankan Airlines by August. However, the process has faced interruptions and uncertainties, particularly due to the divestiture of SriLankan being marred by multiple delays and debt restructuring.

Effective competition and regulation are necessary, to enhance efficiency and protect public interests. Sri Lanka lacks strong competition laws and regulatory institutions, and privatisation without these elements risks converting public monopolies into private equivalents.

The 1997 privatisation of Sri Lanka Telecom (SLT) serves as a model of competition driven reform; it highlights the need for competition and regulation prior to privatisation.

Privatising SOEs in the run-up to elections leads to heightened uncertainty and risk with the possible deprecation of asset prices. Delaying the bidding process until after the election or elections can increase their value for money and ensure better long-term outcomes.

In May, former president Mahinda Rajapaksa issued a statement opposing the immediate privatisation of SOEs and suggested that such actions be postponed until after the polls.

Moving asset bids to until after the election season and prioritising foundational reforms can help achieve better outcomes for both public and investors, and ensure that SOE reforms contribute to Sri Lanka’s economic future.

If privatisation must proceed, it should follow principles that ensure competition precedes privatisation with transparent accounting. And the process must not compromise public welfare to satisfy short-term liquidity needs.

The stakes are high, and ensuring that the reforms are right is imperative to garnering a sustainable economic recovery… without a repetition of past mistakes.