The state interest in SOEs should be in policy and regulation

20 October 2015 06:30 pm - 0     - {{hitsCtrl.values.hits}}

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Enterprise Development Deputy Minister Eran Wickramaratne recently in an interview observed that the government’s interest in state enterprise should be in policy and regulation. The general thinking worldwide nowadays, especially after the financial crisis, is in line with Eran’s thinking that governments should not run commercial enterprises, no matter whether they are profit-making or not, and the government should only limit its involvement to simply running essential public utilities. We all know it’s not the government’s job to run businesses. It should act as a regulator and facilitator. 

Over the years successive governments have dumped hundreds of millions of rupees just to prop up loss-making state-run corporations and as a result, increased our public debt many times over. The new ministry of enterprise development has been given almost 75 percent of the state-owned enterprises (SOEs) in this country. The mandate according to Eran is to get the SOEs allocated to the ministry restructured, bring into management more efficiency and reduce the dependence on the taxpayers. Currently the institutions that are under the purview of the Parliamentary Committee of Public Enterprises (COPE) are:

Banking and finance
  •     Bank of Ceylon
  •     People’s Bank
  •     National Savings Bank
  •     State Mortgage and Investment Bank
  •     Housing Development Finance Corporation (HDFC)
  •     Lankaputhra Development bank
  •     Pradeshiya Sanwardena Bank
  •     Sri Lanka Savings Bank
  •     Employees’ Trust Fund Board

Insurance
  •     Sri Lanka Insurance Corporation
  •     National Insurance Trust Fund
  •     Sri Lanka Export Credit Insurance Corporation
  •     Agriculture and Agrarian Insurance Board

Energy
  •     Ceylon Electricity Board
  •     Ceylon Petroleum Corporation

Ports
  •     Sri Lanka Ports Authority

Water
  •    National Water Supply and Drainage Board

Aviation
  •     Airport and Aviation Services (SL) Ltd
  •     SriLankan Airlines
  •     Mihin Lanka

Commuter transport
  •     Sri Lanka Transport Board

Construction
  •    State Engineering Corporation of Sri Lanka
  •    Central Engineering Consultancy Bureau
  •    State Development and Construction Corporation

Livestock
  •     Milco Ltd
  •     National Livestock Development Board

Plantation
  •     Sri Lanka State Plantations Corporation
  •     Janatha Estates Development Board
  •     Kurunegala Plantations Ltd
  •     Elkaduwa Plantations Ltd
  •     Chilaw Plantations Ltd
  •     Kalubovitiyana Tea Factory Ltd
  •     Sri Lanka Cashew Corporation

Nonrenewable resources
  •     Lanka Mineral Sands Ltd
  •     Lanka Phosphate Ltd
  •     Kahatagaha Graphite Lanka Ltd

Lotteries
  •     Development Lottery Board
  •     National Lottery Board

Health
  •     State Pharmaceuticals and Manufacturing Corporation of Sri Lanka
  •     Sri Lanka Ayurvedic Drugs Corporation
  •     State Pharmaceuticals Corporation
  •     Sri Jayewardenepura General Hospital

Media
  •     Independent Television Network Ltd
  •     Sri Lanka Rupavahini Corp
  •     Sri Lanka Broadcasting Corporation

Marketing and distribution
  •     Sri Lanka Handicraft Board
  •     State Timber Corporation
  •    STC General Trading Company
  •    Lanka Sathosa Ltd
  •     State Printing Corporation
  •     Ceylon Fisheries Corporation
  •     Ceylon Fishery Harbour Corporation
  •     Ceylon Fertilizer Company Ltd
  •     Colombo Commercial Fertilizer Company Ltd
  •     Hotel Developers Ltd

Strategic direction
Many of the institutions that have been vested with the new ministry have been moved out from other ministries; it may have been prudent however to have allocated them on the basis of similarity of subjects. For example, the Central Bank of Sri Lanka, which regulates all banks and financial institutions, is under the Economic Affairs and Policy Planning Ministry. Thus, the monetary and financial policy of the government has to be implemented by two totally different ministries. This may result in conflicts. It would have been prudent to have one cluster for all the state banks and the Central Bank. 

Similarly, other SOEs would have been better managed if they were allocated to ministries with related functions. This clustering of institutions with similar functions in one ministry will automatically ensure the concentration of experts in that field in that ministry. Management scholars such as Henri Fayol argued principles such as specialization of labour and the right span of control result in optimal organisational performance. The right mix would also enable the minister in charge to take a long-term view and optimize the income generation potential of the institutions under his purview.


Making SOEs profitable
Governments usually fail in business because politicians, not business executives, run governments. Politicians generally make political decisions, not economic ones. Generally, cost management does not work well with bureaucracies. Indeed, when cost efficiencies are inescapable, bureaucracies often make cuts that inconvenience the public, generating political pressure thereafter to reverse the cuts. 

Usually, the CEO of a private sector company has the power to manage independently. He decides the company policy, recruits the right people, and allocates resources very much as he thinks best to achieve the set objectives for the year. The board of directors, generally does nothing more than reviewing the strategy, the risks, challenge some of the initiatives of the CEO and then ratify his moves, and will certainly fire him, if he fails to deliver the promised results. This allows a company to act quickly when needed.

The next issue is the government is regulated by the government. It is the government’s job to make and enforce the rules that allow a society to function effectively. But it has a dismal record of regulating itself. Therefore, while we all know capitalism isn’t perfect. Indeed, to paraphrase Winston Churchill’s famous description of democracy, it’s the worst economic system except for all the others. 

But the inescapable fact is that often it is the profit motive and competition that help to keep enterprises lean, efficient, innovative, encourage meritocracies and stay customer-oriented and this is often not the case with SOEs. Therefore, Eran certainly has a big challenge on his hands firstly, to ensure he finds the right talent to run the SOEs, secondly to ensure the SOEs gradually become less of a burden on the taxpayers and eventually all SOEs pay for their upkeep.

(Dinesh Weerakkody is a 
senior company director)
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