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.
In 2012, the total amount allocated for the following companies such as Ceylon Electricity Board, Ceylon Petroleum Corporation, National Water Supply Drainage Board, Airport and Aviation Services (Sri Lanka) Ltd, SriLankan Airlines Ltd, Mihin Lanka Ltd, Sri Lanka Transport Board etc. has been Rs. 27,777 million. This amount has increased to Rs. 67, 465 million in 2013 and to Rs.126, 392 million in 2014. As such, there is a drastic increase in the amount of money that has been allocated.
Meanwhile, the recurrent amount that has been allocated on SOEs has been Rs. 8700 million in 2012. This figure has decreased to Rs.6218 million in 2013 and increased to Rs.11179 million in 2014. But there is an increase in the capital amount that has been spent. For example, in 2012, the amount that has been allocated has been Rs. 19,077 and in 2013 it has increased to Rs. 61,247 and this has increased to Rs. 115,213 in 2014.
Meanwhile, there is a vast difference in the amount that has been allocated in percentage too. For example, the amount that has been allocated for recurrent expenditure in 2012 was 0.10% and this has decreased to 0.06% in 2013 and increased to 0.11% in 2014. The amount that has been allocated for capital expenditure in 2012 was 0.22% and this has increased 0.64% in 2013 and increased to 1.12% in 2014.
According to the Fiscal Management Report 2016, SOE for non-profit institutions in Sri Lanka during the period 2012- 2015 August, for institutions such as Sri Lanka Institute of Tourism and Hotel Management, Gem and Jewellery Research and Training Institute, National Institute of Library and Information Science etc. record a drastic difference in operating/profit amounts. For example, in 2012, it has been Rs. 68,866 and this figure has decreased to minus Rs. 22970.
In the majority of instances, SOEs continue to experience huge losses because they do not face tough competition unlike the private sector. Instead, they continue to experience conflicting financial and social objectives, for example, providing their services at a low cost which in turn leads to such institutes not making profits, but making losses. In the majority of Asian countries like Sri Lanka they have had political interference, especially, during the past few years which has led them to take improper decisions that have threatened the financial targets of SOEs. For example, if they had to meet a certain financial target during a fiscal period, this had been thwarted due to unnecessary political interference. At the same time, not employing talented and capable people for the right job has weakened the functioning of SOEs as talented workers have tend to join the lucrative private sector which means gain for the private sector and loss for SOEs.
Is there hope for SOEs in the future?
Meanwhile, certain SOEs are attempting to compete with the private sector. Initially, this may not be successful. But in the long term this may show results. According to experts, SOEs operate behind a curtain and do not reveal necessary information, instead conceal their losses and are not transparent in their transactions. This may be also due to their wish to avoid comparison with the private sector or their lack of knowledge in clear and concise corporate communications. But transparency is necessary, especially, to carry out financial transactions and also to establish financial objectives as transparency helps to create accountability and also to increase public support for any changes that are necessary.
At the same time, many SOEs which have transparent agreements are not steady and the public think that they are not transparent. This happens mostly due to the fact that they do not have the proper leadership as well as the necessary think tanks to carry out their work as well bureaucratic inertia which is due to the lack of talented people who are not employed in SOEs.
To overcome this problem, there should be talented and capable CEO-led teams which can avoid unnecessary red tape and political interference which are barriers to success. If these teams can bifurcate from their loss making entities and instead practice a performance-based environment they can be role models for their organization and also show the others a path to better performance. To achieve this, they can outsource necessary talent if they cannot find the necessary talent within the organization.
At the same time, SOEs also face many hurdles such as getting their plans approved easily unlike the private sector, at times, due to political clout. This is also another aspect that has to be looked into.
Acquisition of necessary talent
Is this possible for SOEs with their bureaucratic and lethargic attitudes towards acquiring the necessary talents? In order to meet the necessary financial targets and be devoid of making losses they must attract necessary talents by offering competitive salaries along with other perks which compete almost on par with the private sector. This initiative may be difficult at the initial stages due to the heavy losses they make and also due to bureaucratic red tape. Yet, in the long term they can perform better if proper talented people are recruited. SOEs can do this easily with the support they get from the government than the private sector. To retain proper talent necessary for enterprises to function smoothly, many organizations offer a performance-based culture coupled with many other incentives.
At the same time, SOEs should be bold enough to hire talented foreign nationals where necessary as is done in many developed European countries, especially for senior and key positions. They in turn can lead the other employees and drive the organization to success.
Is Privatization and Public Private Partnerships necessary?
In many developed countries, especially, in Europe many services are operated by the private sector and some services are operated with public private partnerships. This modus operandi has yielded excellent results and these institutes or organizations have performed better. To achieve this, SOEs can attract talented officers from the private sector on a short time basis, for example, for one or two years while giving them the opportunity to render their services to the private sector also, if and when necessary.
At the same time, when the labor market is more competitive and when the private sector involvement is high with public and private partnership, the performance of the employees also becomes better as they view their future in employment much better.
When SOEs operate better and deviate from making continuous losses they do not have to be funded by the government forever. This eases the burden on tax payers.
At the same time, the government should also have certain policies for SOEs if they are to operate as profit-making entities such as sound labour policies for employers to make the labour market more competitive, open opportunities, i.e. more flexible opportunities to the private sector to compete in the same industries more effectively and yield profits. The government should not also get too involved in managing SOEs.
Meanwhile, an independent body (an organization or institute) should do a deep analysis of profits and losses on financial sector institutes as well as non-financial sector institutes to rectify the mistakes of the past and turn them into profit-making bodies, thereby, lessen the burden on the government and tax payers.
*Arundathie Abyesinghe is a graduate of the University of Kelaniya and has also read for a Postgraduate Degree in International Relations. She is a veteran journalist with over 20 years’ experience in three mainstream newspapers. At present she works as a Lecturer/Trainer at SriLankan Airlines and in the editorial team of the Presidential Secretariat Research and International Media Unit. The above article is based on a research report of Advocata Institute “The State of State Enterprises”