23 February, 2024

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Privatization Of Defence Sector Enterprises For Alleviating Economic Crisis

By Rohana Jayaratne

Rohana Jayaratne

Many analysts point out Sri Lankaʼs extremely high military spending as one cause of the country’s financial crisis. It is believed that the right sizing of the armed forces within the next 5-10 years is of critical importance to economic recovery.

As a percentage of GDP, Sri Lanka spends nearly 2% on military expenses, considered extraordinarily high for a country that does not face a serious national security threat. Since the end of the war in 2009, military expenditure has consistently been on the rise. The defence spending allocation now stands at around 539 Billion Rupees for the year 2023 with approximately 88% spent on recurrent expenditure in order to sustain an active military force of around 250,000. It is proved to be bigger than the British Army in both size and expenditure making it an obvious liability to the government. 

The defence sector should invest more in cutting edge intelligence technology and expertise in keeping with modern defence strategies rather than maintain an outmoded and costly manpower force. However, no meaningful steps have been taken by successive governments as well as the present government to rationalize and modernize the army into an effective defence service. 

The original intention of the defence sector in seeking self sufficiency in supplies and consumables by making use of its dormant peace time manpower force has now far exceeded its limited defence mandate through the gradual penetration into most areas of the private sector such as manufacturing, construction, agriculture and even tourism. In addition, they are contracted to maintain, upgrade and sometimes even construct several public facilities such as parks, sports stadiums, cultural centers and even religious sites. As all the manpower resources required for such commercial activities are provided by the defence forces, the cost are absorbed by the defence budget instead of the respective ‘commercial’ enterprises. This has resulted in an unfair advantage and distortion of their profitability in comparison to competing private sector enterprises.

The defence sector has also made inroads into the sphere of education through the establishment of The General Sir John Kotelawala University (KDU) in 1980 as a part of an armed forces modernization scheme. In 2012, it became a fee levying entity. The Academy has now matured into a fully-fledged university, consisting of nine faculties, offering both undergraduate and graduate studies. The South Asia Institute of Technology and Medicine (SAITM) was also incorporated into the KNDU in 2017 which produces doctors. However, It must be noted that in 2021, the parliamentary debate on the Bill to formally recognize its university status was cancelled due to strong opposition on grounds of militarization of education and its’ fee levying status. 

The KDU has recently expanded to commence a ‘University Village’ in Sooriyaweva with the establishing of a Faculty of Computing and a Faculty of Built Environment and Spatial Sciences in addition to defence and strategic studies on 140 acres of land vested by the government.

In order to rapidly reduce the State’s liability of all abovementioned defence sector enterprises, an attractive strategy would be for the government to facilitate Management Buy Outs whereby ownership could be transferred to the stakeholders or through commercial privatization as proposed in the case unprofitable SOE’s.

The opportunity for a broad-based ownership structure with external stakeholder accountability will, undoubtedly, be an incentive for the defence sector entities to aspire to become competitive commercial enterprises which will help substantially reduce the government’s continuing and growing fiscal support. However, the government would need to guarantee a contractual period limited to a few years for the supply of products and services of such entities in order to ensure their gradual transition into commercially viable enterprises together with a Sunset clause to eventually terminate such preferential support.

References:

https://www.dailymirror.lk/opinion/Right-sizing-the-Sri-Lanka-Army/172-249511

https://www.ft.lk/Columnists/privatisation-is-bad-peoplisation-is-good/4-607757

https://economynext.com/sri-lanka-pment-will-not-debate-controversial-defence-university-bill-this-week-84557/

https://www.advocata.org/commentary-archives/2022/11/27/defence-expenditure-the-elephant-in-the-budget#:

*Rohana W. Jayaratne is an economist and formerly with UNDP/ DFCC

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Latest comments

  • 4
    0

    Would the Author say IF there is any form of national security threat that SL faces.
    If there are no security threats why even write, ‘a country that does not face a serious national security threat’.
    How can anything be considered serious when none exists.
    .
    It is just not the politicians who create imaginary threats for their gain, but also writers.
    .
    What is the best National Security?
    Wouldn’t that be a population that is confident that the Government can be trusted to be Fair and Prudent.

    • 2
      2

      Thanks, Nathan, for telling the simple truth.
      .
      My mind is fatigued by all this hair-splitting. It looks as though the author is on “our side” – but isn’t it time to “simplify” the system? Unnecessarily large funds are allocated for Defence, but are spent elsewhere, with dishonest pickings for crooks. Who can possibly understand all this stuff? We, who interact here have rather more patience with all this endless “argumentation”. Most citizens have stopped thinking at all; they are saying “We are getting on with looking after only ourselves. What happens to the common weal is so much poppycock.”
      .
      It is easy enough to breed cynics who say things like that. Step One is to treat people the way that they are being treated now.
      .
      To set this right the necessary first step is to consult the people by conducting Local Government Elections. Getting that done is the necessary first step towards rebuilding the trust of people in good governance.
      .
      Panini Edirisinhe in Bandarawela

      • 2
        0

        Sinhala_Man,
        I am not any wiser than you or anybody else.
        It doesn’t take much to be wise. Need to be caring only. As simple as that.
        System change is simply a cliché. We have lost our moral qualities. Our thoughts, feelings, and actions have to change.

  • 4
    0

    The camel in the tent is what to do with the demobbed soldiers. Turning military enterprises into “efficient” private ones would mean reducing the number of employees and making them work harder. Management too cannot consist of Generals in fancy uniforms. We saw their level of efficiency(or not) during Gota’s regime.
    Putting a lot of well-trained killers on the roads would be inviting Big Trouble. The present sacrosanct status of the “Ranaviruwos” was created by the populace themselves. Even the JVP dares not criticize them, anymore than it dares criticize the Mahanayakas.

    • 4
      0

      “As a percentage of GDP, Sri Lanka spends nearly 2% on military expenses, considered extraordinarily high”
      2% is not a lot compared to other things, but the fact is that there are hidden budget allocations for the military, which bring the total up to more than that for education and health. That is unacceptable.
      “It is proved to be bigger than the British Army in both size and expenditure”
      Not in expenditure. The Brits spend billions of Pounds on their Army and get a quality product. The British Army has hundreds of modern tanks for example. I expect that only the few antiques we proudly display at Galle Face actually work.

  • 2
    0

    Privatisation of Military or reduction of military size or reduction of government service employees is easy to say in this country after increasing the size of military and government employees over the decades. Most of those increases are from majority Sinhalese. Almost more than 95% of the military, police and naval forces are Sinhalese. Even the increase inthe government service are from Sinhalese. The Political leaders including Ranil could not touch the employees or military because imagine if over 500000 go out of job what will happen to those families. Definitely, there will be bloodbath inthis soil and no one can enjoy the executive presidency or ministerial or MPs benefit along with businesses. Even IMF wants to that option. That is why they increased the taxes and prices to its maximum. IMF wants that the loan and the interest should be paid back whatever happens to cost of living or children dieing of malnutrition. IMF also not worried about arresting the youth who are peacefully protest.

    • 1
      0

      (Part I)
      Ajith,
      “That is why
      1. They (IMF/Government) increased the taxes and prices to its maximum.
      2. IMF wants that the loan and the interest should be paid back whatever happens to cost of living or children dying of malnutrition.”
      I was pondering on the questions raised by you as above
      The taxes (1) were increased, because the government of Non-Governance by GR/MR/BR had the revenue raising by the state, to a Non-Event by reducing taxes far below the average based on taxes to GDP ratio in the rest of the world, claiming election promises to unsustainable levels!!! The treasury was “hard put” or perplexity, unable to maintain operational expenditure/salaries! It was therefore inevitable that they had to go up, Boost Revenue to meet expenditure!! That, was in respect of the local (Domestic) revenue only, no direct impact to earning USD, but the concern of delivering services in such situation, to enable enhanced TOURISM, EXPORTS, FDI!!!?? So it was condition by IMF ensures unhindered revenue – in It’s endeavour earning USD – REPAY IMF LOAN!
      Timely Repayment of IMF loan (2), is Sine Quo Non, for ensuring IBRD, ADB, IDA, Paris Club, Japan, EU and other countries lending future funding
      (TBC)

    • 1
      0

      (Part II)
      for development too!!???
      That is the Parameter to measure CAPACITY OF THE BORROWER AS ELIGIBILITY, to handle enhanced Loan Funding to meet fast development and employment as a consequence!!!?? If not the country would endanger, employment and regular income for citizens, which would lead to chaos and destabilisation!!!???
      This is painful, but VERY NECESSARY PAIN, SHORT MEDIUM TERM!!! ALTERNATIVES NONE!!??
      Our fellow citizens are so naïve that they didn’t VISUALISE this dastardly situation in the horizon, when the Messiah, started those projects post 05/2009, Unwanted in most cases and none had project study, including EIA and RoI – key to ensure capacity to repay development loan!!!???
      Instead, we had “politically ganged up cheering from all”, except few emancipated and erudite economist politicians and grouping, which was drowned by the former even!!!???
      If you contracted ‘Dengue Fever”, no option but take the BITTER MEDICINE to QUELL or DIE!!!??
      Just started the process, hopefully, see the light at the end of the Tunnel sooner than later, so that the brighter future as prophesied due in 2048 is achieved!!!???

      • 1
        0

        Mahila,
        The IMF process is not sufficient to solve the economic crisis or develop this country. Development not only about increasing of the capacity of the borrower eligibility to borrow more money to spend on military expenditure and unproductive investments. The income gap between majority poor and minority rich has widen very badly. The total amount of debt is over 80 billion US dollar. The majority of human resources has exported or moved out of the country and it is now increasing. This leaves only unskilled majority including the rich. There is no mechanism to stop or minimise the corruption. The political stability is minimal. This country is still very weak in competitive advantage of similar countries. Still the country’s future depend on Buddhist Sinhala Fundamentalism which is above the control of politics. Sri Lanka hnever had a continuous stable for more than few years. Rather than focusing 2048, focus on the peace for at least next two years.

  • 1
    0

    The tri forces have a lot of works in the north and East, the archaeological dept heavily dependent on them to do building works,

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