State interest in SOEs should be in policy and regulation

by Dinesh Weerakkody

Deputy Minister of Enterprise Development, Eran Wickramaratne in an interview recently said that the government's interest in State enterprises should be in policy and regulation.

The general thinking worldwide today, especially after the financial crisis, is in line with Wickramaratne'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 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% of the SOEs.

The mandate, according to the Deputy Minister is to get the SOEs allocated to the ministry restructured, bring into management more efficiency and reduce the dependence on 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, and 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, and Ceylon Petroleum Corporation.

Ports - Sri Lanka Ports Authority. Water - National Water Supply and Drainage Board. Aviation: Airport and Aviation Services (SL ) Ltd, SriLankan Airlines, and 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. Plantations - Sri Lanka State Plantations Corporation, Janatha Estates Development Board, Kurunegala Plantations Ltd., Elkaduwa Plantations Ltd., Chilaw Plantations Ltd., Kalubovitiyana Tea Factory Ltd., and Sri Lanka Cashew Corporation.

Non Renewable Resources - Lanka Mineral Sands Ltd., Lanka Phosphate Ltd., Kahatagaha Graphite Lanka Ltd. Lotteries - Development Lotterries Board, National Lotteries Board. Health - State Pharmaceuticals and Manufacturing Corporation of Sri Lanka, Sri Lanka Ayurvedic Drugs Corporation, State Pharmaceuticals Corporation, and Sri Jayewardenapura General Hospital.

Media - Independent Television Network Ltd., Sri Lanka Rupavahini Corporation, Sri Lanka Broadcasting Corporation.

Marketing and Distribution - Sri Lanka Handicrafts 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., and Hotel Developers Ltd.

Strategic direction

Many of the institutions vested in 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 Ministry of Economic Affairs and Policy Planning.

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 have one cluster for all the State Banks and the Central Bank.

Similarly, other State-owned enterprises 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 the field in that Ministry.

Management scholars such as Henri Fayol, argued that principles such as specialization of labour and the right span of control results in optimal organizational 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.

The CEO of a private sector company generally has the power to manage independently. He decides on company policy, recruits the right people, and allocates resources as he thinks best to achieve the set objectives for the year.

The Board of Directors, generally does nothing more than review 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 that 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. 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 helps to keep enterprises lean, efficient, innovative, encourage meritocracies and stay customer-oriented, and this is often not the case with SOEs. Therefore, the Deputy Minister certainly has a big challenge on his hands first, to ensure he finds the right talent to run SOEs, second, to ensure that SOEs gradually become less of a burden on the taxpayers and eventually all SOEs pay for their upkeep.

The writer is a senior company director.