SOEs and running Buhari Hotel

Privatising state owned enterprises (SOE) has become one of the most dreaded notions in this country so much so that its terminology has ‘ slightly’ been altered to people-lisation.

Why? Because successive governments have made a mess of it.

While each citizen in the country is aware that something isn't right with the SOEs, most are sceptical about privatisation because the public is more than convinced that this will breed more ' horas' ( thieves) than what's seen at the SOEs now.

Now thanks to these regimes, 400 odd SOEs are becoming a burden to the country squeezing out every last penny from the taxpayers. The Sri Lanka Transport Board (SLTB) had Rs. 12 billion in outstanding EPF/ETF payments, of which Rs.8 billion has been paid “somehow” over the past couple of years. SLTB and Mihin Air have failed to make any profit for the last 10 long years and if a company cannot be turned around in 10 years, the ability of the management should be questioned.

The idea to start SOEs was to use them as part of an alternative model of economic development, a model which was seen in the Soviet Union at the time. But it didn't happen.

Big zero

SOEs now control major parts of the economy, and this model has definitely failed, because they are disincentives to competition. They are shielded from competition, with state being the big brother, highly politicised and appointments are not made on merit.

To the most part this has much to do with those that get appointed to the boards of SOEs. (Think Sri Lanka Insurance Corporation Ltd’s former Managing Director T. M. R. Bangsa Jayah who refused to quit, the day the new MD Keith Bernard assumed duties).

An investment analyst noted that these boards may have professionals, but not those who can stand up to the politicians. The SOE boards are in short dependant and filled with 'yes men'.

From time immemorial chairmen of boards are some catchers of higher up in the government or a political stooge.

Governments usually fail in business because politicians, not business executives, run governments. Politicians in general make political decisions, and hardly eco- nomic ones. Cost management does not work well with bureaucracies.

How is it that SOEs are fertile grounds for robbing? It's easy to explain – create subsidiaries and sub subsidiaries under the main SOE.

Still not clear? During the last regime a maze-like range of companies were incorporated as subsidiaries and sub-subsidiaries of SOEs under the Companies Act, which analysts say would be difficult to track. Many have also been steering clear of scrutiny of the parliament's Committee on Public Enterprises.

Take SLIC for an example. In 2011, many subsidiaries were created under the SLIC when Ceylinco's Hyatt Hotel was taken over after the Ceylinco bankruptcy. SLIC created a subsidiary for it. Now Hyatt is valued at US$ 350 million. Analysts say that a better hotel at this amount can be bought at New York. So how has it become this much?

Robbing

Those who don't agree are welcome to show Hyatt’s accounts. There're SOEs without budgets, accounts, etc. and most of them do not have proper financial data. ( Data is publicly available for 55 out of 255 SOEs). For 95 per cent of the losses which adds up to Rs. 605 billion, Ceylon Petroleum Corporation, Ceylon Electricity Board, Sri Lankan Airlines, Mihin Lanka and SLT B are responsible. SriLankan which recorded a profit of Rs. 4.4 billion in 2008 saw an atrocious nosedive having suffered a whopping loss amounting to Rs. 107 billion, in the last regime.

The state is now looking for expertise on a restructuring model for SriLankan but that’s another story.

Incidentally questions are also raised on the level of public scrutiny in a SOEs’ accounts let alone its subsidiaries. Funding SOE losses with bank credit and 'taking on the burden' has been a formula for economic instability and balance of payments dilemma in the past.

Most of the capital and investments in SOEs are funds taken from the public as tax. There won't be a VAT hike if these SOEs weren't bleeding. As simple as that.

Now this regime under the Public Enterprise Ministry is more than struggling to ' restructure' ( before going public with them) certain SOEs. They received Cabinet approval for a number of restructuring efforts for state plantation companies namely JEDB, SLSPC, Elkaduwa, Chilaw and Kurunegala plantations. The Chilaw and Kurunegala plantations are profitable but not as much as they could be.

“The others have lots of issues and at the moment we are trying to maximise productivity and make them efficient. Again, it is not a management restructure but to go for multiple partnerships and the positive side is that there has been huge interest from foreigners and locals, big companies, wanting to take over parts of the companies and do various projects. Some of them are multi-cropping projects, some are to improve tea and rubber that is already there, some are eco- tourism projects and dairy farming. We think we can have a good arrangement where the state could become partner in some cases and in others lease out the land. We believe all this land can be productively used. Some of the land will be distributed among the people on an out-grower basis for small- holders,” Kabir Hashim, Minister Public Enterprise has told media in the past.

So again, why is the public against public listings of SOEs?

Miracles

It was done wrongly during all the past regimes. They appoint their stooges to the boards as “Thank you’s”. Listing will bring that elusive discipline to SOEs. It will bring them transparency.

This is family silver. It's public property. In the listed universe there're ways of establishing true value. There'll be a need to produce accounts. This is what's called peopalisation.

The first best solution to the running of SOEs in Sri Lanka is to have a timetable to privatise, Razeen Sally, an Associate Professor at the Lee Kuan Yew School of Public Policy at the National University of Singapore and Chairman of the Institute of Policy Studies, the main economic-policy think tank in his native Sri Lanka, has said. He said that the obvious economically efficient solution is to privatise as many of the SOEs as possible over a realistic period of time. This will depoliticise them as much as possible, in other words, separate ownership from management.

Good news is that the Department of Public Enterprises of the Finance Ministry this month on behalf of the government signed Statements of Corporate Intents ( SCIs) with selected SOEs on the back of a recently released International Monetary Fund ( IMF) statement stressing the immediate need to finalise and publish SCIs for large SOEs to enhance the transparency and accountability in the reform process Sri Lanka has embarked upon. The Cabinet of Ministers has sanctioned five SOEs to sign SCIs - Ceylon Electricity Board, Ceylon Petroleum Corporation, National Water Supply and Drainage Board, Airport and Aviation Services Ltd and Sri Lanka Ports Authority.

SCI is a tripartite Memorandum of Understanding ( MOU) to be signed by Secretary to the Ministry of Finance ( MOF), Secretary of relevant line Ministry and the Chairman on behalf of the Board of Directors of the respective SOEs.

SCI includes key performance indicators (KPIs) link to corporate plan, action plan and annual budget of the SOEs for three years' time horizon starting from year 2017. In addition, the impact of all non-commercial operations by the SOEs are also taken in to the account and included to SCI. On the success of the implementation of this initial programme, the government is expecting to extend this move for the other SOEs as well.

At this ceremony, Sri Lanka’s F i n a n c e M i n i s t e r R av i Karunanayake told media that more than 350 SOEs have stopped bleeding under the ‘good governance’ regime, after it took over two years ago. “There are 403 stateowned enterprises, of which 200 were making losses when we took over. The loss making entities are now below 50. That too should be reduced. The others are either making profits or breaking even,” Mr. Karunanayake said. He said most SOEs were capable of making profits, but that due to political interference, they were not making profits. Miracles can happen.

The public is in a fool’s paradise if they think that SOEs are for the benefit of the people.

Also the politicians are in a worse place if they think they're running a country. No sirs you're running loss making entities – much like the Buhari Hotel. (Duruthu)