The IMF’s Governance Diagnostic Assessment identifies state-owned enterprises as high-risk for corruption, with weak management, inadequate oversight, manipulated procurement processes, political interference, and a lack of transparency. Publicly guaranteed SOE debt alone accounts for a staggering 10% of Sri Lanka’s total public debt.

A new report from the Colombo-based think tank, Advocata Institute, reveals that Sri Lanka’s state-owned enterprises (SOEs) are not only a significant source of corruption but also hinder the country’s economic progress through poor governance and monopolistic practices.

Rehana Thowfeek, a research consultant at Advocata Institute, emphasized the gravity of the situation, stating, “State-owned enterprises are a major source of corruption vulnerabilities in Sri Lanka. I don’t think there’s anyone who can deny that. They distort markets.” Thowfeek’s comments underscore the pervasive issues plaguing SOEs, which dominate crucial sectors such as banking, energy, and telecommunications, often operating as monopolies with minimal competition.

Dhananath Fernando, Chief Executive Officer of Advocata, echoed this sentiment, suggesting a complex solution. “Everything can’t be privatized, we know,” Fernando said. “Some have to become public-private partnerships, some have to be managed by regulating them.” He highlighted the need for a nuanced approach to SOE reform, blending privatization with effective regulation.

In response to mounting concerns, the Sri Lankan government has made attempts to address the challenges facing SOEs. Suresh Shah, Director General of the State Owned Enterprise Restructuring Unit, revealed that a new state-owned enterprise policy has been approved by the cabinet. This policy aims to introduce a law designed to mitigate political interference in board appointments, manage subsidies, and establish clear disclosure requirements.

“We are putting the policy into a law,” Shah explained, “a draft of a law has been done which clearly lays out how to take political interference out of board appointments, how to treat subsidies, what disclosure requirements are necessary, what kind of board members should be appointed… it’s based around nine principles.”

An IMF prescription

The Advocata Institute’s latest report, titled “Getting the State Out of Business: The Compelling Case for Privatization of State-Owned Businesses,” aligns with the International Monetary Fund’s (IMF) recommendations for wide-scale privatization of public enterprises. The think tank’s report highlights that SOEs are a major obstacle to economic prosperity in Sri Lanka. With over 400 SOEs across 33 sectors and approximately 250,000 employees, these entities have become an inefficient and bloated bureaucracy.

The IMF’s Governance Diagnostic Assessment identifies SOEs as high-risk for corruption, with weak management, inadequate oversight, manipulated procurement processes, political interference, and a lack of transparency. Publicly guaranteed SOE debt alone accounts for a staggering 10% of Sri Lanka’s total public debt, exacerbating the country’s financial crisis. SOEs have historically relied on government bailouts, further straining national resources.

The report also points to market distortions caused by SOEs, which dominate key sectors like telecommunications, banking, and energy. This dominance stifles competition and innovation, discouraging private investment. Despite clear evidence of the problems, attempts at SOE reform have been slow and ineffective. The official policy of privatization was abandoned in 2005, and efforts to improve SOEs through corporatization and parliamentary oversight have only led to worsening conditions. The SOE Reform Act, a crucial piece of legislation for restructuring these state entities, remains stalled, and SOEs continue to operate without meaningful competition or consumer protection.

Advocata Institute argues that privatization is a necessary step to address these issues. Privatization could reduce fiscal pressures, inject efficiency into poorly managed enterprises, attract essential investments, and eliminate corrupt ties between politicians and SOEs. By transitioning SOEs to private ownership, Sri Lanka could potentially overcome the inefficiencies and corruption that currently plague these entities.

Urgent need for reforms

Critics of privatization often raise concerns about job losses, asset stripping, and unequal distribution of benefits. However, Advocata Institute contends that job losses, while a potential outcome, should not derail privatization efforts. The impact on employment varies; in some cases, private investors may absorb excess staff without major disruptions, while in others, large-scale redundancies may be necessary. Generous severance packages, retraining programs, and robust oversight mechanisms can mitigate negative impacts on workers and ensure a fair transition.

Moreover, a vibrant private sector, freed from the constraints of inefficient SOEs, holds the promise of generating more and better jobs, contributing to overall economic health. Empirical evidence suggests that, contrary to popular belief, job losses are not always a direct result of privatization. In some instances, private ownership has led to job creation and increased income for employees, as seen with the privatization of Sri Lanka Telecom.

With Sri Lanka currently facing a severe financial crisis, including default on international debt and ongoing negotiations with creditors, the need for SOE reform is urgent. The government is under pressure to meet conditions set by the IMF, and the Advocata Institute’s report underscores that reforming SOEs is crucial for economic recovery. Privatization offers a pathway to enhanced efficiency, increased investment, and reduced corruption, aligning the interests of managers with those of owners and eliminating political interference. In summary, Sri Lanka’s state-owned enterprises have become a significant economic and governance burden.

The Advocata Institute’s report presents a compelling case for privatization on the lines of IMF’s prescription as a means to address the inefficiencies, corruption, and fiscal strain associated with SOEs. As the country navigates its economic challenges, the transition to private ownership of these enterprises could be a key factor in restoring fiscal stability and fostering economic growth.