Cleaning up SOEs

Governments have been talking about it for ages; the International Monetary Fund (IMF) has been pushing for it over many years but still nothing has been done. I am talking about restructuring of loss-making stateowned enterprises (SOEs) or selling them off, a conversation that has been had for many years but without any forward progress. The simple reason is that ruling parties consider it politically suicidal to reshape these entities since they have become reservoirs for ruling parties to pack these institutions with their supporters after an election.

There was an interesting discussion on the ‘power crisis’ organised by the Sunday Times Business Club (STBC) a few weeks ago. Unfortunately, the elephant in the room wasn’t discussed or raised as a question. No one asked or sought clarification as to why the Ceylon Electricity Board (CEB) doesn’t make profits when every user of electricity pays their bills or get disconnected!

Incidentally, the CEB on Wednesday got approval from the Public Utilities Commission (PUC) to increase electricity rates by over 60 per cent which would add to the woes of the public struggling to make ends meet under a snowballing economic crisis, exacerbated by the recent tax hike. Protests have been mounting against the tax hikes after many workers found their disposable income vanishing in January after the tax hike.

As I sat down to write today’s column on SOEs, I was intrigued by the conversation under the margosa tree. “Mata therenne neththe vidulibala mandalayata laaba neththe mokada kiyala api okkoma light bil gevana kota (I can’t understand how the CEB is not making profits when we are paying our bills),” asked Kussi Amma Sera.

“Prashney thiyenne api bil gevve nethnam light kapanawa ne (The problem is that if we don’t pay our bills the power will get cut off),” grumbled Serapina.

“Samaharavita, viduli bala mandalaya paudgalika anshayata baara dunnoth hariyata kalamanakaranaya karanna puluwan wevi (Maybe if they hand over this institution to the private sector it can be properly managed),” suggested Mabel Rasthiyadu.

Debts in particular of the two biggest state entities, the CEB and the Ceylon Petroleum Corporation (CPC), have been mounting. According to official data, the CPC’s total dues to the Bank of Ceylon and People’s Bank as at the end August 2022 were around Rs. 1,042.0 billion. The CPC also has to pay Rs. 228.8 billion for the Indian Line of Credit facility for the importation of petroleum products.

The CEB’s outstanding obligations to the state banks were Rs. 563.6 billion as at end August 2022. Credit to 52 prominent SOEs by the two state banks was over Rs. 2.8 trillion as at the end of August 2022.

As I was contemplating these issues, the phone rang on Thursday morning. It was Seeni Bola, my banker friend (so named by friends after he once boasted that other banks were handling ‘seeni bola’ deposits compared to his bank), on the line.

“I say, the CEB has gone and increased electricity rates. How can people afford these new rates,” he asked.

“Consumers have no choice as the CEB’s debts were mounting and previous attempts to increase rates have been prevented by the PUC,” I said.

“But this is so unfair and comes as an additional burden to consumers who are struggling these days as consumer prices rise and new taxes are eating into disposable incomes,” he said.

“It’s also strange that the increased rates come at a time when the country is heading for an election. The increase in electricity rates coupled with the new taxes would make the government even more unpopular,” I said.

“Well that’s why the President in a recent speech said that he has to make unpopular decisions for the economy to be on track,” he said.

One of the requirements of the proposed US$2.9 billion bailout package by the IMF, which has seen some extraordinary delays largely due to the delay in getting debt restructuring assurances from Sri Lanka’s main creditors – China and India –, is a rigorous restructure of the country’s loss making SOEs which include the CEB and the CPC. By this it means, converting the CEB and CPC to profitable units by passing on price hikes of global fuel prices to the consumer instead of subsidising the cost to reduce the burden on the consumer.

In restructuring SOEs, the reality is that while the authorities have accounts and other details including assets of 52 institutions strategically important for the proper functioning of the economy, little data is available (particularly accounts and net assets) of another 400 SOEs.

SriLankan Airlines’ cumulative liabilities (including accumulated losses) were Rs. 440 billion in the financial year 2020/2021. However, the airline has reported operating profits for the first half of 2022 and reportedly its best 6-month period in many years, according to its CEO.

Recently the Ceylon Chamber of Commerce (CCC) made many recommendations to restructure SOEs. “The presence of SOEs in strategic sectors of Sri Lanka is proof of the significant value creation it can generate through spillover effects. The societal returns too are greater as it links to our day-to-day activities such as the water we drink, the electricity we use, or even the bus or train we ride on,” it said in its recommendations.

Therefore, addressing the suboptimal performances of SOEs by inculcating a performance oriented culture whilst ensuring transparency and accountability are warranted at this difficult juncture of trying to recover from economic turmoil, it noted.

While the Government may need to operate some SOEs due to reasons such as providing essential goods and services at an affordable price, there are a large number of SOEs which are purely engaged in commercial activities that can function more efficiently and effectively under private sector ownership, the CCC noted.

Among other things, the CCC proposed the setting up of a SOE Reform Agency which would separate the state’s ownership functions from its policy-making and regulatory functions in order to help avoid or minimise potential conflicts of interest; minimise the scope for political interference and bring greater professionalism to SOEs; and promote greater coherence and consistency in applying corporate governance standards and performance management systems across all SOEs.

It said the SOE agency should operate under the Ministry of Finance (MoF). Countries such as Singapore, Malaysia, India and the UK too have their SOE agency under the MoF, it was noted.

As I wrapped up today’s column just as Kussi Amma Sera brought in my second mug of tea saying, “Viduli mila ihala yanawa (Electricity rates are going up)”, my mind was more focused on the coming days, weeks and months when

Sri Lanka enters a tumultuous period of elections making it more difficult to restructure loss-making SOEs.