By Gamini Jayaweera –
Finance Minister, Mr. Ravi Karunanayake presented the “Yahapalanaya” government’s budget for the year 2016 to the Sri Lankan Parliament in November 2015, indicating that the proposed estimated expenditure would be Rs. 2,787 billions and the estimated revenue and grants for the same period would be Rs. 2,047 billions leaving a budget deficit of Rs. 740 billions. According to the media reports, following the initial talks with the IMF about a loan which could be used to plug gaps in the budget, the Finance Minister has stated that the IMF is very concerned about the size of the budget deficit, over-estimated revenue, and the under-estimated costs. It appears that the IMF’s concerns over the budget deficit indicate that the deficit would be more than the amount which has been tabled by the Finance Minister during his budget speech. If the IMF can, within a very short period of time identify the inaccuracies in the estimated revenue and expenditure budgets tabled by the Finance Minister, one has to question the honesty and integrity of the Ministry of Finance. It has also been reported that the IMF may demand, presumably asking the Finance Minister to raise taxes and control the public sector spending budget in order for them to authorize the loan which has been requested by the Finance Minister.
Before we examine how to tackle this huge budget deficit we need to examine where we were during the last 6 years and where we are now in relation to our economic position. During Mahinda Rajapaksa regime, we as a nation enjoyed a fantastic “economic boom” and some politicians of the previous regime, business leaders, and to a certain extent the general public were having a “jolly good time”. The general public were led to believe that the Rajapaksa regime had laid a strong foundation on solid ground for a healthy economy. People were confident that they could spend today with borrowed money and pay tomorrow because they would have a “vibrant” economy in the near future under “Mahinda Chinthana”. The government, the general public and some private sector organisations went on borrowing because they believed that tomorrow is going to be better than today. Banks and lending institutions, with the backing of some government ministers and MPs of the previous regime, allowed certain section of the society to borrow money without sufficient, or with no security for their debts. Additional consultancy commissions and contracts were placed at higher than normal price levels with the previous regime’s favored private sector companies because of the increased spending in the public sector organisations. Business leaders were happy as they were making substantial profits and bonuses. The problem was most of our Politicians, top Business Leaders, and Bankers from the previous regime turned a blind eye to a very basic principle of Capitalism which is “Bigger the Boom, Greater the Bust”. To make things worse, in our case the “Boom” was built on huge amount of borrowed money with a very weak industrial base. It is now understood that instead of building the economy with a strong foundation on solid ground, the previous regime has built our economy with a very weak foundation on “sand”.
It appears that during last six years most of our politicians, business leaders, and top managers in the financial sector have behaved in a greedy, irrational and abnormal way to create the state which we are currently in. We have paid a very high price for having a “jolly good time” for some section of the society during the previous regime. We have created huge debts which cannot be paid in the foreseeable future. We are leaving unprecedented debts to be paid by our children, grandchildren, and great-grandchildren for the mis-management of the economy by the previous regime. Why should our children, grandchildren, and great-grandchildren take this huge responsibility of repaying these debts which have been created by some politicians and their cronies of the previous regime? We have to confess that we were living beyond our means during the so called “Boom” time.
The state we are currently in, has created very serious problems for the new government in terms of financing the public services. The government has already borrowed vast amount of money for maintaining the public services by creating a very large deficit in the government finances. The public finance budget deficit will not be eliminated for a very long time unless we take some bold measures. We all have to make some sacrifices for the blunders made by the previous regime and their cronies. Unfortunately, we all have to take a share of the pain. I mean both public and private sector must understand that this is the payback time. It is our duty to make a positive contribution in reshaping the structure of our economy to strike a balance. It is not morally and ethically justifiable for us to leaving a huge burden on our children, grandchildren, and great-grandchildren because of the irresponsible greedy behavior of the last regime and their cronies.
It is the duty of the President, the Prime Minister and the Finance Minister to explore all avenues and come up with innovative solutions to balance the budget as there is a substantial budget deficit. It reminds me of the late Prime Minister of Great Britain, Lady Margaret Thatcher’s famous statement about the government expenditure; “Pennies don’t fall from heaven – they have to be earned here on earth.” Though I do not agree with some of her policies, we have to admit that she had the courage, the determination, and the strong leadership to change the economic culture of Great Britain to deliver the government policies to conduct its affairs within its means. Leading her government based on her philosophy of “There can be no liberty unless there is economic liberty” was a huge success in the direction of economic recovery in Great Britain during the 1980’s.
It is a fact that State Corporations and other Government Institutions in Sri Lanka play a vital role in the country’s economy as well as providing a major contribution to the social and technological developments. Therefore, it is worthwhile briefly to discuss the areas where we can make a substantial impact in the public sector expenditure budget if we are disciplined and bold enough to make decisions to change the mindset of most our Ministers, MPs, and Departmental Leaders in the public sector who think that the Sri Lankan Treasury is a “bottomless pit”.
Financial Discipline, setting Budget Targets for various ministries, effectively dealing with financial wastage in the public sector, employing visionary leaders to run public institutions, retention of competent workforce, moderate tax increases, and delivery of goods and services in a most economic and efficient manner are some of the necessary ingredients among other measures that are required to strengthen the economic sphere together with the political, social, health, and education of the nation as advocated by the Prime Minister.
Financial Discipline & Budget Targets
The ultimate goal for any commercial organisation is to manage its business performance to ensure that it delivers its products and/or services in a most economic and efficient manner and to the complete satisfaction of its customers and shareholders. In non-profit organisations, the eventual goal is to deliver their products and/or services on or below the annual budget allocated by the treasury and to the complete satisfaction of the general public and their political masters. It is a well-known fact that the majority of the Sri Lankan government institutions’ performances are inefficient, uneconomic and very much below the generally acceptable level.
In order to maintain financial discipline, the leaders of these institutions must establish their estimated expenditure budget on reliable and accurate information with a detailed risk assessment which may have an impact on the estimated budget. To ensure that the expenditure will not overrun the allocated budget, the leaders of these institutions are required to establish a risk mitigation plan to minimize the impact if those risks would materialize during the duration of the financial year. The leaders must also put in place transparent and clear lines of responsibility for the budget execution process to avoid any irregularities and financial surprises (external claims etc.) during the period of execution. If financial problems are encountered during the execution period, the leaders need to take immediate action to bring back on track the expenditure forecast to the initial budget target implementing an effective Change Control process. A creation and execution of a well-disciplined Public Expenditure Management policy by the leaders of these institutions to tackle mis-management of allocated budget provisions is vitally important to deliver the goods and services to the satisfaction of all stakeholders.
Setting annual budget targets based on 5% to 10% less than the allocated budgets by the Treasury is the best way to successfully manage the funds available for these institutions. As there is a substantial budget deficit, the public would expect the Finance Minister to impose reduced budget targets for these institutions, if the Ministers and the leaders of these institutions are not putting forward proposals to reduce their annual budget through performance efficiencies. The performance measures put in place to manage the reduced budget targets will improve the delivery of goods and services most economic and efficient manner to satisfy all stakeholders.
Having a minimum target of 5% performance savings on expenditure budget will save the Treasury at least 37 billion rupees which can be used to pay off our debts. The leaders need to set aside the soft-budget constraints currently in place and must impose tight budget controls to achieve the desired results without lowering the quality of delivery of goods and services, because the Treasury is not a “Bottomless Pit”. It appears that there is a lack of direction from the Finance Ministry to plan and implement mandatory performance targets for the government institutions, due to their incompetence or undue political interference from other quarters.
It is a well-known fact that most of our state owned institutions waste millions of rupees due to lack of effective operation & performance management, non-existence of processes & procedures, absence of corporate governance, inadequacy of transparency & accountability, and lack of commercial awareness exhibited by some of the people who are leading these institutions. The leaders need to engage the workforce to think outside the box to reducing waste, increasing customer satisfaction, and gaining maximum monetary benefits without lowering the quality of products & services. The workforce (not just the top managers, but all employees) must be encouraged and motivated to challenge the “Status Quo” and implement the changes that are required to improve the delivery processes and procedures of the organisation to eradicate the wastage which is costing millions of rupees to the Treasury. The leaders have to implement stringent cost and time saving programs, removing unnecessary excessive expenditure and under-utilized resources within their departments or corporations, if they are to succeed in meeting their budget targets.
If the leaders of these institutions say that they carry out all their activities in a most economic and efficient manner with minimal or no waste and therefore they cannot make any more savings, we do not agree. It has been reported in the past that big companies in the USA, Europe, and Asia have claimed to have saved billions of dollars by eradicating cost related to poor quality products and services. Motorola, General Electric, IBM, Sony, Lockheed Martin, Nokia, Bank of America, Ford, Bombardier, Boeing, Toshiba, and Kodak to name a few, are some well-known organisations which have recorded successful implementation of cost saving methodologies in the past. These cost saving methodologies have been introduced not only by the large manufacturing organisations but also by the service industries, government departments and small businesses. Leaders can always raise the bar to make savings without lowering the quality. If we adopt tried and tested cost saving methodologies available in the market place, we are certain that the introduction of increase in proposed taxation will not become a “Tax on Jobs”.
I have had first-hand experience working as a Senior Manager in a privatized company which was a public sector organization in the UK prior to privatization, where we had made millions of pounds saving every year from 2003 to 2009 by implementing Six Sigma management philosophy which enabled us to design, monitor, and manage our business to decrease waste, increase quality and directly impact the bottom line. We did not experience any compulsory redundancies during this period. If the leaders in the government sector can put in place a strategy to motivate the workforce to embrace the “can do” attitude, we can make substantial amount of savings by managing the wastage effectively in our public institutions. We need to educate our hard working managers, union representatives, and the workforce who have not been effectively led by some of our leaders of these institutions, to change their mindset to think that the Treasury is not a “Bottomless Pit”, it has only got finite funds to support these public institutions.
It is an inherent problem that the leaders, managers, union leaders and the workforce in the government sector always believe that the public institutions do not have to function as commercial organisations because the government will step into bailout them from the tax payers’ money when they are in financial difficulties. The leadership of these organisations must change their mindsets to recognize the fact that the non-profit organisations can also function economically and efficiently for the benefit of the general public and the Treasury. The leadership must also take an active role in implementing policies to change the mindsets of their managers, union leaders, and the workforce to recognize the concept of economic and efficient running of all government sector organizations. In order to lead effectively, leaders need to find ways to engage the work force, generate their excitement, enthusiasm, and commitment because its people that hit targets, beat budgets, improve quality, cut down wastage and deliver outputs.
The visionary leaders not only should consider planning, budgeting, organizing and implementing control systems but also must give priority for working very closely with the workforce, team building, effective communication, and introduction of various reward and recognition schemes to motivate the employees. The traditional “blame culture” should be avoided and mistakes must be regarded as part and parcel of the learning curve. Killer thoughts and statements such as “It’s too big for a change.’, “Why change it? It’s still working.”, “That sounds good in theory, but……..”, “It won’t work here.”, “May be that will work in your department but not in mine.”, etc. should be left behind. It reminds me of former Prime Minister of Great Britain Sir Winston Churchil’s statement about optimism: “A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty.”
Changing the mindset of the workforce on participation, trust, belongingness, competitiveness, creativity and drive to achieve business objectives is part and parcel of the cultural changes that are required in the workplace, for the successful implementation and maintaining a long-term improved performance which will contribute to deliver the goods and services on or below budget targets, hence making a valuable financial contribution to the Treasury during this uncertain global economic climate.
Retention of Competent Workforce
The Prime Minister, Mr. Ranil Wickremesinghe recently addressing the Parliament about the government economic vision for Sri Lanak, stated “We are caught in a development gap because we do not have competent people”. Addressing the Annual General meeting of the Engineering Association last week, President Mahithripala Sirisena has stated that what the intellectuals should do is to make a vital contribution in building the country rather than leaving the motherland. So, the message is loud and clear that there is a brain drain in the country. It is important that the government should understand the root cause for the brain drain. Though the President has stated that low salary is the reason for competent professionals leaving the country, there are many other contributory factors could be identified for their decision to leave the motherland. Some of those factors are:
- Political interference
- Non-visionary leadership
- Low salaries and poor working environment
- Absence of promotion opportunities
- Declining job satisfaction
- Lack of recognition or rewards for good performance
- Lack of training opportunities
It appears that there are no comprehensive, clear HR policies in the public sector organisations to improve the recruitment and retention of competent professionals to support the task of building the motherland as requested by the President. It is evident that development and implementation of an effective human resource management recruitment and retention policy without political interference, would help to retain competent professionals to make a vital contribution in building the country. The government need to take urgent action to implement a policy of retention of competent employees because the cost of replacing them is huge, due to factors such as Loss of productivity of the vacant positions, Cost of temporary replacements, and Recruitment costs, etc. Therefore, it is evident that retention of competent employees is a strategic issue and it provides significant benefits including substantial cost savings in the public sector organisations to achieve the reduced budget targets set by the Treasury.
Proposed Tax Increases
Though the Cabinet Committee on Economic Management has proposed to increase the direct tax from 10 to 20 percent and the income tax and company tax from 15 to 17.5 percent, the Prime Minister delivering a special announcement in the parliament on 8 March has proposed moderate tax increases. It appears that the proposed moderate tax increase is to fund the estimated budget deficit due to ever increasing public sector expenditure as stated by the Prime Minister in his special statement to the parliament.
The Opposition, some Union & Business leaders might argue that this is a “tax on jobs” and these tax increases will create more job losses and industrial unrest. But Union & Business leaders of the public and private sector organizations have a responsibility to think rationally and make a valuable contribution to sort out the “financial mess” which we are in now for the sake of our children and grandchildren. These are extraordinary times which require extraordinary measures because we are all in it together.
While agreeing with the Prime Minister’s vision of building a Social Market Economy based on social justice principles, I believe that it is better to provide additional funding which is required primarily for upgrading the education and health systems fit for the 21st century by introducing a mixture of moderate tax increases as proposed by the Prime Minister and finding the required shortfall from introducing efficiency measures, leadership training for public sector employees, and cutting waste in the public sector with minimum job losses as described in this article inter alia with other performance measures.
Bearing in mind the current uncertain international economic environment and understanding the current economic state we are in, the above described compromise could be adopted to resolve the issue which will benefit both public and private sector with minimum job losses and a possible budget surplus which could be utilised to reduce our debts, fund innovations, research & development, and training & development of our workforce because those are the cornerstones of rebuilding our economy. It is important that we invest money in these areas because great economies are driven by innovations, constant research & development, and continuous training & development of the workforce. It is time to stop scoring political points and grow up for the sake of our children and grandchildren.