17 October, 2017

Sunset For State Enterprises

By Charitha Ratwatte –

Charitha Ratwatte

Charitha Ratwatte

The riddle of everlasting life

It is a sad phenomenon of our times that enterprises fuelled by taxpayers’ money have a tendency to act contrary to nature and go on forever and ever. It is the nature of all things in this world that change is the only constant. Nothing, no entity whatever, can survive, if it cannot adapt to the changing environment in which it operates. The dinosaur is the prime example.

We in Asia know well what happens to political and regal dynasties which set themselves up for eternal rule. The dustbin of history is where they end up, with the occasional plaintive squeak, of a revival, once in a while, just to reinforce the point, that nothing is eternal! The survival of the British monarchy is a case in point for adapting to change – a one-time absolute monarchy, imbibing strength from foreign royal houses, being forced to surrender power to the Lords and Commons through the Magna Carta, over time becoming a classic model for a constitutional monarchy.

The House of Windsor drew genes from the House of Battenberg of Germany, which deftly adapted and changed its name to the Anglicised Mountbatten (a direct translation of Battenberg), and when Britain fought Germany in World War II, a descendant of the House of Battenberg, a.k.a. Windsor ,was on the British throne – irony of ironies! This is classic tale of adapting to survive.

Vacuum cleaners for tax money

Losses-making state enterprises, which have an access to unlimited taxpayer funds, sadly, do not abide by this rule. The sunrise of the State-Owned Enterprise (SOE) is heralded with great celebration, a steel mill, a tyre factory, a coal power plant, and cement factories. paper factories, chemical plants, all symbols of the greatness of the state – which in most developing economies, private enterprise will not touch, due to the high capital investment and huge risks, which will not give a return on investment for years, are started up by starry-eyed statist economic planners and politicians, using the taxpayers’ money.

Sadly over time, they are run down, not maintained, the technology is dated and the poor tax payers have to pump in money to keep the inefficient and loss-making plants and enterprises running. It has been well proved that government servants, especially politicised ones, cannot run enterprises profitably. Such SOE are vacuum cleaners for tax money, sucking it up and just tend to go on and on, for misbegotten national prestige or the power of trade unions, managers and politicians, who fight change or simply due to the lucrative nature of the skimming off which takes place by the political masters. There is simply no change.

We have the example of a extractor of minerals on Sri Lanka’s east coast, which for over 40 years has done nothing more than extract and export the sand. No value addition, no downstream industry investment, no new technology – all zero. Yet, because it is an SOE, it simply goes on and one doing the same thing over and over again, for 40 years! There is no incentive to change. Further there have been doubts cast whether all the revenue from the exports reach its proper source!
COPE experience

How taxpayers’ money is spent is in a democratic parliamentary set up is monitored by elected representatives of the people, through what is called a Public Accounts Committee, of Parliament, to which the accounts of all SOEs are submitted with a report of the Auditor General for scrutiny. However, it was soon realised that a post-expenditure compliance audit of this nature was utterly useless for a State-Owned Enterprise, while it may be useful for a Government department.

Some parliaments therefore set up a Committee on Public Enterprises (COPE) or its equivalent to supervise the accounts of SOEs. Sri Lanka has done this. But the results from the COPE experience are a parody. One newspaper editorial recently reported that the officials of the Media Ministry had been directed by COPE to remove the Head of the State Printing Corporation over an alleged fraud. The Editor described this as a manifestation of –‘the largely toothless COPE has been pushed to individualistic and perhaps controversial action’.

The Editor goes on to say that the Chairman of COPE, a Senior Minister no less, has repeatedly issued warnings that the monitoring of public finances is in a deplorable state and that it is high time that Parliament acted on COPE reports. Further the Editor points out that there are 13 SOE companies, established in the last 10 years, some loss making, and which are not audited by the Auditor General.

They are serial loser Mihin Lanka, Shipping and Aviation Information Research Ltd., Polipto Lanka Ltd., Sri Lanka Thriposha Ltd., Rakna Aarksha Lanka Ltd., Lanka Logistics and Technologies, Sri Lanka Savings Bank, Lankaputhra Development Bank, Sri Lanka Insurance Corporation, State Trading (Wholesale) Co. Ltd., Lanka Sathosa, State Enterprise Management Authority, and Gal Oya Plantations Ltd.
Gal Oya

The words Gal Oya, rings a bell – indicating one of the possible credible evolutions of a SOE in Sri Lanka. The original Gal Oya Development Board was set up as a statutory Authority to develop one of Ceylon’s first multipurpose big dam irrigation and power schemes, in the Eastern Province. This was totally funded by the taxpayer (no foreign aid) and a highly-successful development project led by politicians and civil servants of integrity.

Later this SOE was transformed into the River Valleys Development Board, to undertake the Walawe development and later its salient parts were integrated into the Mahaweli Development Authority. In this latest avatar, the body lives on and on, although the Mahaweli Accelerated project was long ago terminated, the authority lives on, seeing repeated sunrises and sunsets with a cycle of unrelenting rebirths!

There have been a number of ‘golden handshakes,’ some funded through funds borrowed on concessional terms, to close up the authority, but with every ministerial change, which happens on a regular basis in this ‘Wonder of Asia,’ there is a series of new recruitments!

No will to change

At a recent discussion on this SOE problem organised by the Pathfinder Foundation, Professor Sirimal Abeyratne of the Colombo University bemoaned ‘the lack of political will’ to reform and change SOEs in Sri Lanka. He stated that Sri Lanka has around 300 SOEs in various and varied guises, some of recent origin in camouflage uniform too (more of that later).

The legal structures are an unmitigated jigsaw puzzle; statutory authorities, companies, trusts, cooperatives, joint ventures. The Ministry of Finance Annual Report details the heavy reliance on taxpayer money for most of these serial losers to survive from day to day.

The six big boys are the Ceylon Petroleum Corporation, the Ceylon Electricity Board, SriLankan Airlines, Sri Lanka Transport Board, Mihin Lanka and National Water Supply and Drainage Board. Some of these are commercial operations in airline and ground transport in which the private enterprise makes handsome profits. Others are suppliers of essential utilities which in other jurisdictions are run at a surplus. In this ‘Wonder of Asia,’ they are robbing the poor taxpayers’ pocket!

There is no will to change. There is no incentive to change. The poor taxpayer, muzzled by censorship, muddled by corruption and befuddled by imaginative accounting procedures, which are not adequately exposed by a mere post facto compliance by Government auditors, bordering on outright fraud, has no voice, while his hard-earned money is siphoned off to keep a variety of corrupt politicians and their incompetent acolytes happy.

Private enterprises vs. SOEs

Compare a private enterprise. Two British nationals came to Ceylon, in colonial times and set up a partnership to buy coffee, rubber tea and coconut and other ‘Ceylon Produce’ from British planters and local growers and supply them to the wholesale trade in London. They did well and floated the company on the local stock exchange and gave their shareholders a good return on investment. In time they expanded into management of plantations.

Later when they saw the decline in these sectors on the horizon – that the inevitable sunset was coming – they moved into the leisure business, to take benefit from concessions and incentives offered by the State for development of tourism. Today, seeing that gambling plays a huge part in the tourism industry; they are moving into the casino business! All done, in order to change with the times, be competitive and give their shareholders a return for their investment. If they did not do that, they would have to fold up and liquidate, succumb to the inevitable sunset, not having tax money to keep them artificially afloat.

Compare this with the SOE set up to benefit from the tourism concessions, the Ceylon Hotels Corporation; although it had some prime properties to manage, it was run to the ground and sold off to the private sector, after repeated raids on taxpayers’ money failed to deliver a resurrection!

So also, a gentleman from Switzerland, who came to set up a business, sees an opportunity in supplying fertiliser to the plantation industry. In time this enterprise migrated into importing Swiss pharmaceuticals, became the General Sales Agent for Swissair, got into plantation management and today is one of the leading conglomerates in Colombo, proving regular dividends to its Swiss investors. The Ceylon Fertiliser Corporation on the other hand bit the dust and is being propped up by taxpayer money for no known and perceived benefit to the taxpayer.

The list can go on and on. History is replete with SOEs crashing to the ground kept on artificial life support by taxpayers’ money while private enterprises in the same sectors adapt to changing conditions and make profits and pay taxes! Of course there are the exceptions which make the rule, the State Plantations Corporation and the CTB were run profitably at one time, under professional and disciplined managers – but for how long? They were made unsustainable due to corruption, downright theft of public assets but kept unchanged using taxpayer’s funds.

Sunset clause

In reality we cannot hope for a world without SOEs. They are needed and in some instances are classic examples of cutting-edge management best practice and governance. Singapore’s State-owned strategic investment company, Temasek Corporation comes to mind. But in a populist democracy, where management of SOEs are rewards to political acolytes and cronies, rather than assignments to competent managers, the only viable way to protect taxpayers’ money is by building in what is known as a ‘sunset clause’ into the originating document of the SOE, be it a Articles of Association of a Company or a Statute or a Cooperative Ordinance.

In public policy law, a sunset provision is a measure within a statute, regulation or other document incorporating an entity that the law shall cease to have effect on a specific date, unless further action is taken to extend the lifetime of the entity. Sunset provisions have their root in the Roman law of the Mandate Theory. A mandate was issued by the Senate in Rome, to collect taxes, raise a legion, etc. for a fixed timeframe and expired thereafter, and had to be renewed by the Roman Senate. The senators were wary of the proconsul having an open-ended, uncontrolled and unlimited mandate.

How do you translate this sunset theory into today’s issue Sri Lanka faces with SOEs which are loss-making parasites living forever on taxpayers’ money and being – proverbially – ‘no bloody use at all’? The most sensible way to do it would be build in a mandate say for five-year lifetime when the SOE is created and provide that the managers of the SOE at the expiry of the five-year period will have to come before a panel of peers and prove their worth, the positive work they have done and justify the further extension of the mandate.

The panel of peers could be managers drawn from private sector institutions such as Chamber of Commerce, the Organisation of Professional Association and the Institute of Directors, etc. The hearing should be public and stakeholders in the sector should be allowed to come and question the managers of the SOE on their performance or underperformance. There would have to be rules of procedure for questions to be raised, notice to be given in advance, etc.

To give an example, say the SOE is the Tourist Development Authority, the other stakeholders in the sector – travel agents associations, hotel owners associations, trade unions, professional groups such as hotel managers associations, tour guides associations – should be allowed to come before the panel and question the performance of the SOE. Public hearings and public participation will ensure transparency, and the managers of the entity will have to really make a strong case for their future continuity.

Peer Panels

Often politicians are opposed to any SOE reform when they are in office. To get around this problem the Report of the Panel, which should be a pubic document, should be submitted to a bipartisan Parliamentary Select Committee, which also should hold hearings on the Panel’s Report and make a recommendation to Parliament, on the extension of the life of the SOE or its closure, i.e. implementation of the sunset clause.

The Members of Parliament may be divided on party political lines, as they normally are, in making their recommendation, but at least the taxpaying public and consumers will have before them a Peer Panel Report recommending the future of the SOE, based on its past performance, and also a Parliamentary Committee’s recommendation on the Peer Panel’s final recommendation, whether the SOE, if it is loss maker gobbling up taxpayers’ money, should be further funded by the taxpayer to continue. All this will be in the public domain and the taxpayer will know what is being done with his money.

At one time the Ministry of Policy Development set up a prototype of these Peer Panels informally, had a process going for some months in collaboration with the Ministry of Finance with SOEs being invited to present their performance. Unfortunately the experiment was later scrapped. For existing SOEs a timeframe should be fixed for them to appear before a Peer Panel. Another option may be to list on the Stock Exchange a certain percentage of shares of the SOE, after converting it into a stock company. The discipline of compliance with the regulatory rigour imposed by the listing forces an SOE to reform and change. India did this with the State Bank of India.

Camouflage business

Sri Lanka has a new phenomenon – Camouflage business. Recently there has been a surge of enterprises by the military. Service men and women, most often in camouflage uniforms or in track suits, have taken to the construction industry, managing golf courses running air lines, managing hotels and resorts, whale and dolphin watching tours, wayside tea boutiques, selling vegetables, maintaining parks and public spaces and most recently eradicating dengue and reconstructing buildings destroyed in Aluthgama by communal violence. Are all these legitimate and authorised military activities?

The Comptroller and Auditor General of India famously raised this question regarding the Indian Army-maintained Regimental Golf Courses! The issue was, does the Parliament of India, which votes taxpayers’ money to the Indian Army to defend Mother Bharath from external enemies, also permit these funds being utilised to maintain golf courses for Army officers playing golf? The same question arises here.

Some of these may be laudable enterprises. Certainly it is conceded that a victorious Army cannot be sent home, even though with full pension, after winning a war. One recalls the infamous ‘March on Washington’ by demobilised GI Joes after World War II, protesting that they had no jobs. The US Defence Department had to deploy armed cavalrymen to break up the demonstrations. But are these camouflage enterprises which results in the crowding-out of private enterprise sustainable in the long run?

It was reported at the Pathfinder seminar that the SL Army has raised four new civil engineering regiments post-war. Anyone in the private construction industry should sit up and take notice! There is a strong argument that there should be a sunset cause for all these military camouflage enterprises too. It is conceded that private enterprises may not see a viable return on investment in running hotels in post-conflict regions immediately. The military might have to justifiably step in, in the immediate post-conflict timeframe, to initially provide these facilities.

For example if there is no place for local tourists visiting Prabhakaran’s destroyed home, to buy a cup of tea, even, there can be no objection to the nearby military camp opening a tea boutique, temporarily. But should the military step back at some time and let private entrepreneurs, who pay taxes, and are not subsidised by the taxpayer, step in?

It is claimed that in Germany after World War II, the American and British and French forces had to set hospitality and utility services for visitors as there was no one else to do it in the zones controlled by them; Germany’s economy had been bombed into the dust by the Allied Bomber Commands air raids. But their intervention was time-bound, and as soon as indigenous German entrepreneurs could set themselves up, the Army retreated to their barracks. The sunset kicked in.

Given the Sri Lanka experience with loss-making SOEs, there is a strong case for a sunset process, Peer Panel Review and Parliamentary recommendations, and maybe listing on the stock exchange of all of such SOE and camouflage enterprises to avoid the haemorrhaging of taxpayers’ money.

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Latest comments

  • 1
    0

    I look forward to Charitha’s articles- good for adult citizens, good for students of all social sciences and above all, goo for politicians.

    I’m very pleased to note he speaks of sunset clauses as in:

    NOW FOR THE LONG TERM – The report of the Oxford Martin Commission for Future Generations, October 2013, http://www.oxfordmartin.ox.ac.uk/downloads/commission/Oxford_Martin_Now_for_the_Long_Term.pdf

  • 0
    0

    What happens to the profits generated by those camouflage businesses ? Do they go back into the the treasury and reduce the tax payers burden of paying salaries for such a large army ?

    I’m sure that even if they do go back the existing red tape would just make those funds disappear into a black hole of Government SOE losses!

    If not what happens to them ?

  • 0
    0

    Rattwatta(DR) has poor knowledge of Present US economy after 2008 Wall street Financial depression ,how that largest Mega Investment Banks lost huge amount of Capital had been Funded by Tax payers Money of USA citizen.
    Very large Monetary and Financial damage to US economy that in the long-term predictable financial pattern which we have never seen since 1945 by supporting Tax payers Funds Run all Major Investment Banks by in US ruling Class in power of Wall street.
    Is like when a Fish is taken out of water it cannot survive. Hence that Wall street Major Investments Banks lost all operational and Capital funds by that is urgently needed reorder and injects Billion or Trillions Dollars belongs US taxpayers money had been Pumped Banks for new operational Funds for Banks by US Treasury and State.
    That is how US National Debt has rise into 13 Trillions dollars while exceed debt limits at that time. Ratawata(DR) has no sufficient data of SOC in world specially, US economy and Financial system ongoing bankrupt US Private Capital policies.
    This is higher risk of Political -Economic-Finical and instability, not only that US, needless to say it will effect World Economy as well as Tiny Island f Sri Lanka.
    Hope Rattawta( DR) has to learn more on Economy and politics for future reorder of New Capital Market and Capitalism not which that Sri lanka only but that US headed Global Power.
    US Economy contribution to elaborate legacy of capitalist enterprise bequeathed to us in our time.
    That we call reformed of system into sustainable Capitalism, in World wide.

  • 0
    0

    Kind attn.
    Mr. Charitha Ratwatee. I was delighted to see you at this page. I was working with you last 4 years under unv program. Still I remember your suggestion. you easily can remember my photograph from our web sites.
    Please, reply me soon.
    With kind regards.
    SUNIL Bangladesh

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