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| Sunday, 14 July 2002 |
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| News Business Features Editorial
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Biz Buzz Privatizations Ever since Margaret Thatcher introduced privatization of State owned and manage commercial enterprises in the early 1980s, most countries have adopted that as a policy to reform loss making institutions, improve efficiency and service quality, especially of utility providers, revitalize businesses that were making profits (usually as monopolies or under State protection) and of course, to raise funds for Government expenditure. The J R Jayawardena Government, elected in 1977 embraced privatizations from that time, starting with privatizing the management of selected State owned enterprises, notably the textile production units of the National Textile Corporation. Post 1977 successive Governments in Sri Lanka have been engaged in a policy of privatizations, but in some periods the reform agenda had been pursued more vigorously than in others. Are privatizations good or bad for an economy, especially of a country like Sri Lanka? Was it necessary or good to sell profit making enterprises such as the Distilleries, Telecom or Insurance? The public and policy makers appear to have had a majority who favoured, or at least did not oppose the sale of loss making enterprises. The tea and rubber plantations, steel corporation, the Gas Company, Colombo Commercial Company and a host of other loss making enterprises were sold without much resistance, except perhaps from the trade unions who were concerned about the rights of their members and far left political groups whose policy was not in favour of a free market economy. Privatizations go hand in hand with an open economy that depends on the private sector to run commercial organisations. Experience, here and abroad over the past 20 years seems to suggest that commercial organizations are better managed and substantial efficiency gains were made under private ownership. Take the following examples. Tea plantations in Sri Lanka, immediately prior to their nationalization in 1974/75 had yields of 872 kg per hectare per year as compared with 1300 kgs in India and 1032 kgs in Kenya. By 1991, Indian and Kenyan yields had improved to 1770 kgs and 2023 kgs respectively while Sri Lanka was at 1086 kgs. Post-privatization, the yields have increased to 1368 kgs in ten years. Many of the tea and rubber plantations that ran at losses under Government ownership and management prior to 1992 have turned into profitable enterprises post-privatization and have paid many billions of rupees to the State as income and other taxes. Prior to 1990, Sri Lanka Telecom (SLT) was a monopoly. It was immensely profitable. But a consumer had to wait months, if not years to get a new phone line. A faulty telephone line was not repaired for days or for weeks. International call charges were prohibitively expensive, quality of service was poor and there were not more than 100,000 phones in the country. Government telecom policy was developed in the 1980s to liberalize the telecom sector by allowing mobile operators (beginning with Celltell) and later two fixed line (wireless local loop -WLL) operators to compete with the State monopoly, SLT. This competition spurred SLT to improve its service, but would it have survived in the face of stiff competition without the first stage privatization, so successfully carried out in 1996/97? Today, SLT is not only profitable, but also provides an excellent service. Beginning from early 1988, the Insurance industry was liberalized to allow private sector companies to compete with the two State owned insurance corporations provided they were 100% locally owned. Several years later, foreign investment up to 49% was permitted and this year, that was relaxed to 100%. One of the two State owned Corporations was privatized in 2000. The other, the Sri Lanka Insurance Corporation (SLIC) is to be privatized later this year. Can we not expect the benefits of telecom sector liberalization and the SLT privatization to flow from the liberalization of the insurance industry and the privatization of SLIC? The privatization program in Sri Lanka has been fine tuned over the years under four different administrations; of Presidents Jayawardena, Premadasa and Kumaranatunga and Prime Minister Wickramasinghe. There were some sales that were transacted in a rush and may not have been properly managed. But the policy to divest State Owned Enterprises (SOEs) had overall paid rich dividends. In 1997, the proceeds from the sale of a minority stake in SLT, US $225 million was used to retire a good part of the public (Government) debt. That brought down interest rates and thereby, the cost of doing business. Monopolies, whether State owned or privately owned, are not good for the economy and for society. Liberalization of a sector to allow competition improves efficiency and the quality of service offered to the consumer. It attracts investment, both local and foreign. Once a sector is liberalized and a SOE loses its monopoly, it cannot operate under its public sector structure. It will need the operational flexibility, industry expertise, technology and fresh funds to compete with more robust new entrants who usually are, or have successful strategic investors with international experience in the industry. Following sector liberalization, the SOEs must be privatized if they are to compete and survive and for the State to realize the best value on its investment in the SOEs. One way to come out of the present state in the economy is to retire the public debt from privatization proceeds. A reduced public debt will push down interest rates and make funds (otherwise used for Government expenditure) available for private sector investment and use in business. Sale of SOEs also attract foreign direct investment to reduce the deficit in Balance of Payments and to stimulate the stock market. Furthermore, shifting SOEs to private sector management and ownership (control) can promote efficiencies in the use of resources, improve productivity, make them competitive and equip them to provide a better quality of service to their customers (or consumers). For these reasons alone, privatizations should be a priority in the Government's agenda for reforms. The public should, if convinced by the arguments of this comment, support the restructuring and divestiture of public sector institutions. |
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