Back door appointments killing State-owned enterprises

PM's call for these heads to step down ignored:

by Rukshana Rizwie

Sri Lanka is at a critical economic juncture, weighed down by 'monster' enterprises; unprofitable, debt-ridden State-owned companies, which need constant bailouts. Analysts say Sri Lanka may need to take a cue from China to prevent its economy from 'convalescing' from this 'bad cold'.

Prime Minister Ranil Wickremesinghe attending the World Economic Forum in Davos, Switzerlandthis past week told reporters some harsh home truths, which spoke directly to those who operate these enterprises.

"No one is sure how events will turn out in 2016," he told the press. "We want to be strong enough to face any contingency and carry out our re-structuring."

The Prime Minister's restructuring and reform policy, however, was met with indifference, just days before he left to Switzerland.

He had called a meeting at Temple Trees requesting politically appointed directors of all State enterprises to be present. At the meeting the Prime Minister asked them to resign so that the relevant boards could be reconstituted.

Sources say that while the PM had summoned 160 directors, less than 50 had turned up and only a handful agreed to step down.

They defied his orders on the pretext that they would not flinch since they were appointed by the Secretary to the Treasury.

Many appointments to strategic and non-strategic State-owned enterprises had been made through the backdoor, when Finance Minister Ravi Karunanayake was in charge of these institutions before the August parliamentary elections last year.

With a growing budget deficit of 6.8 percent of the GDP, revenue mobilisation measures in the budget seem inadequate, unless the government depends heavily on privatising loss-making State-owned enterprises - a policy, which has been opposed by the SLFP.

The recent snub on the PM reflects the deepening rift between Minister of Public Enterprise Kabir Hashim and the Minister of Finance Ravi Karunanayake. An official at the Treasury, who has been instrumental in making the appointments, said the rift was only deepening, while officials at the ministries were taking a wait-and-watch approach.

It is learnt that Minister Hashim had wanted certain appointments made by Minister Karunanayeke cancelled. These included the Colombo Hilton and Sri Lanka Insurance, which were previously under the Ministry of Finance and are now under the purview of the State Enterprise Development Ministry.

Minister Hashim said it was the procedure for those appointed by the previous minister to step down and pave the way for the Boards to be reconstituted. However, not many had welcomed the idea.

"There are 427 State-Owned-Enterprises (SOEs) and most of them are restricted to nameboards", Minister Kabir Hashim told an event at Lanka Hospitals recently. "Thirty-six SOEs under my ministry are loss-making establishments. The loss accumulated by several major SOEs amount to Rs. 130 billion annually. That's the amount of money with which we could build 300 schools and 65 hospitals with 300 beds each year. This comparison will help you understand the colossal waste incurred by SOEs such as the CEB, Water Board, Port of Colombo and Ceylon Petroleum Corporation. This is an absolute horror in terms of public finances. We can't allow this to go on".

Heavily politicised

The source at the Treasury, who annually badgers the many SOEs to file audited accounts and annual reports, said many who constitute Boards at strategic and non-strategic enterprises were not only unsuitable for the position but were incompetent.

"Many of these political appointees had joined these organisations through the backdoor," he said. "It's no surprise then that when someone who is qualified to do the job is selected, they are undermined and ousted." He added that the only way SOEs could be restricted, if at all, would be to depoliticise them, which would never happen.

The source traced the link to the mid-1950s, when Sri Lanka (then Ceylon) embraced policies focused on direct government involvement in economic development. With the passage of the State Industrial Corporations Act of 1957 and the Government Business Undertakings (Acquisitions) Act of 1971, the Government laid the foundation for a high degree of State intervention on economic ideals of self- sufficiency and import substitution.

With the passage of the 1977 Agreement, through the systematic nationalisation of private enterprises, approximately 107 enterprises were brought under State control, amounting to 24% of the Gross National Product (GNP), one third of the total investment and 40% of formal sector employment.

According to the interim budget of the Minister of Finance, the government had given Rs. 524 billion as Treasury Guarantees by the end of 2014, which included guarantees given to commercial banks to implement infrastructure developments projects by SOEs and the total outstanding debt of SOEs to the banking sector was Rs. 593 billion.

The minister said the figures do not include foreign borrowings made by SOEs for infrastructure projects (Puttalam Coal Power Plant, Hambantota Port Development Project and Mattala Airport) which adds further Rs.308 billion to the budget deficit. If treasury guarantees are added then the debt of SOEs to the banking system is much higher than published figures.

Incoherence

A detailed confidential report, which was prepared by an independent authority to oversee SOEs details that issues related to them were twofold: policy incoherence, confusion and lack of a strong set of rubrics within, between and amongst policy, regulatory and monitoring agencies tasked with broad oversight of State enterprises and lack of domain expertise within these enterprises, bloated structures, desire on the part of officials to maintain a culture of inefficiency advantageous to themselves or their political backers and a culture of continued state bailout of badly run and/or unprofitable business entities.

The Strategic Enterprise Management Agency (SEMA) was set up as an independent body, under the directive of President Maithripala Sirisena to oversee the activities of SOEs.

Although it was set up under the purview of the President, the absence of a legislative enactment of SEMA defining its scope and authority has reduced it to the level of irrelevance.

Why nations fail

Daron Acemoglu and James Robinson in their book 'Why Nations Fail' cite the modern level of prosperity rests upon political foundation. That prosperity is generated by investment and innovation, but these are acts of faith.

Their argument is that order without inclusive institutions may enable an economy to escape poverty, but will not permit the full ascent to modern prosperity. Their explanation is that if the institutions of power enable the elite to serve its own interest - a structure they term 'extractive institutions' - the interests of the elite collide with, and prevail over, those of the mass of the population.