The future of State-Owned Enterprises (SOEs)

6 August 2016 12:01 am - 0     - {{hitsCtrl.values.hits}}

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Speech delivered by Economic Reforms Minister Malik Samarawickrama at the Sri Lanka Economic Summit held on August 2 and 3

State-owned enterprises are a part of public wealth and are supposed to be for the benefit of the people of the country. Therefore, it is necessary to set up a framework to have State-owned enterprises (SOEs) managed and operated as efficient commercial enterprises, based on prudent commercial principles, ensuring adequate returns equal to or more than the comparable commercial enterprises in the private sector. With this objective in mind, the government will introduce a new Public Enterprise Act within a short period of time.  


The large losses incurred by State-owned enterprises over several decades have been a major drag on the development prospects of the country. Reducing these losses would make a significant contribution towards freeing up resources required to achieve the development objectives of the government.  


It is true some of the SOEs make profits but I believe they are still not run efficiently and do not show the true potential as outlined by Dato Sri Idris Jala. These undermine fiscal consolidation and the balance sheet of State Banks.   


The first channel through which the general population is affected is through the fact that part of the losses incurred by SOEs impact directly on the government budget. This means that the government has to find tax revenues to finance these losses. Or else, the government has to borrow the money domestically and from abroad. These debts also have to be re-paid by the people through future taxes. One way or another the people have to bear the cost of financing these losses. Clearly, the revenue for this has to come out of the pockets of all the citizens of Sri Lanka.   


The second channel through which SOE losses constrain development involves state banks financing these institutions and carrying their accumulated losses on their balance sheets for long periods. This leads to an increase in the interest rate spreads in the two State Banks.The private banks enjoy a ‘free ride’ by following the money market trends set by the two state banks, which are the two main players in the banking sector.This results in higher lending rates for all customers. While this has an adverse impact on the whole business sector, it has a more significant impact on SMEs, which have lower negotiating capacity. I must reiterate that it is the people who ultimately have to bear costs of loss making SOEs through higher taxes and/or interest rates.   


There are a number of recommendations, which have been made to improve the performance of these enterprises. Management practices need to be inculcated that demand accountability and transparency of decision making processes while strengthening the boards and management of SOEs. In parallel, operational independence should be increased to respond to market signals thereby reducing the need for:   

  •  Government assistance at a time when fiscal space is constrained.
  •  Protective barriers, which limit competition thereby increasing prices and lowering quality for the consumer.   
  • The performance of SOEs, particularly the monopolies, should be benchmarked against international standards.   

 

  • Efficiency can also be enhanced through competition via private participation and performance and management contracting (as in China).   

As you are aware, the government is also examining the relevance of Singapore’s TEMASEK Model for us in Sri Lanka. These arrangements will enhance competition and enable private operators to improve the efficiency of service delivery. Other reforms include cost reflective pricing.   


The balance sheets of some SOEs, e.g. the CEB and CPC, have been undermined by having to bear what are effectively government subsidies.These subsidies need to be rationalized and borne by the government’s budget. The practice of shifting parts of the government budget deficit to the balance sheets of SOEs and State Banks should be discontinued.The financial health of these enterprises can also be improved by addressing the arrears owed to them by other state agencies.Clearing the balance sheets of the two State Banks of the losses incurred by SOEs and withdrawing the extension of special credit terms by them to SOEs would facilitate the reduction of interest rate spreads.   


This will boost investment and enhance the profitability of businesses. It would also lead to lower interest spending on government debt. The sale of non-strategic state assets will have a positive fiscal impact at a time when the government’s finances are being constrained by low revenue and high debt service payments. Where the privatization of an enterprise is not considered in the national interest, the sale of minority stakes in commercial SOEs, including through the stock market, will increase disclosure thereby contributing to the improvement of operational efficiency.   


I will say more about the government’s specific plans later in my remarks. Let me first say something about encouraging Public Private Partnerships (PPPs).   
Given Sri Lanka’s fiscal deficit and debt dynamics, PPPs have an important role to play in implementing the government’s extensive development programme. PPPs have the overarching objective of alleviating pressures on government budgets and allowing the public sector to share risks with the private sector in the provision of public services. PPPs also have the added advantage of tapping into new technologies and efficiency gains. Empirical evidence has shown that productivity gains from PPP projects can range from 10% to in excess of 70% over purely publicly delivered projects.   


There have also been significant improvements in the quality of service. It is important however, to ensure that the risks are appropriately shared among the government and the private providers.Under optimal risk sharing contracts, PPPs can also contribute to reductions in costs and delays in construction. In addition, PPPs can increase the capacity of local industry and bring more innovation to specific sectors.   


Several countries, including Chile, Brazil, Malaysia, Peru and South Africa have developed comprehensive frameworks for encouraging PPPs in development projects. Experience shows that a strong PPP framework, which lays out clearly the policy, legal and institutional aspects of contracting PPPs goes a long way in creating the enabling environment for attracting PPPs. The government is working with the Asian Development Bank and the World Bank to create such a framework. Let me conclude by saying something about the government’s plans regarding the disposal of public assets. Over the next few months, it is our intention to dispose of hotels, Lanka Hospitals and prime commercial property in Colombo’s business district via the Stock Exchange or through RFPs. Various options are also being considered for Sri Lankan Airlines on an urgent basis.   


We are also in the process of finalizing PPP or Joint Venture arrangements for the Port of Hambantota and Mattala Airport, thereby reducing the heavy debt burden. These transactions will be conducted in an open and transparent manner. The Prime Minister, in his forthcoming presentation of the 5-Year Plan will set-out a road map for SOE reform and the disposal of non-strategic State assets.   


By way of a final word, let me emphasize that it is no longer viable for the government to allow continued loss making in the SOE sector. The lack of fiscal space, amplified by the debt burden, simply does not allow for this. Through a combination of restructuring and sale of non-strategic private assets, the government is determined to address effectively this long-standing problem, which has been a major drag on the development prospects of the country.   

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