Features
WHY GOVERNMENT SHOULD SELL EVEN PROFIT-MAKING STATE-OWNED ENTERPRISES
By Sanjeewa Jayaweera
The recent pronouncement by President Ranil Wickremesinghe (RW), that “The government has no business to be in business.” was music to the ears of those who believe in a free market economy. However, it also drew the ire of the loony left, the trade unions, a few die-hard academics who still cling to ideals of socialism as well as a few journalists.
In all probability, if a straw poll is conducted, most voters would say that the Government of Sri Lanka (GOSL) should continue to own and operate state-owned enterprises (SOEs). It is indeed a paradox that despite it being well-known that SOEs are inefficient, corrupt and a drain on taxpayer funds due to significant losses, many in our country still believe privatization is undesirable. One can only assume this is due to the entitlement mentality ingrained in us over several decades and the belief that the government should be our provider.
What ails the SOEs
Citizens ultimately own SOEs but have no voice and lack the interest or wherewithal to monitor them. Therefore, efficiency is entirely dependent on the existing system of governance. Political patronage is the criterion for selecting the top management of SOEs allowing government politicians to choose their relatives and close friends despite their having no prior experience in holding such positions. That such appointments have resulted in adverse consequences to the enterprise and the country is a well known fact.
Employment in state institutions has been on a ‘Jobs for the Boys’ philosophy to which many, including university graduates, subscribe. All SOEs are overstaffed primarily due to elected politicians using their power and influence to overload them despite no existing vacancies. The problem has been compounded by the fact that most of those appointed are poorly skilled. Once employed, they join trade unions and demand above-average wages and bonuses even when losses are being incurred. They want their personal income tax paid by the SOE and light work norms. So it is not surprising that despite the economic Armageddon we have hit, many still hang on to the belief that the government should be running businesses.
The need to educate the public
The recent announcement by the government that it intends to divest its investments in Sri Lanka Telecom (SLT), Lanka Hospitals (LH), and the Sri Lanka Insurance Corporation (SLIC) has resulted in many, including the leader of the opposition, the JVP, trade unions, a few journalists and other media personnel together with some academics to say “We are against the privatization of profit-making SOEs.” Their opposition to the sale resonates with the public and supports the theory of selling the family silver.
When a young journalist posed this question to RW at a media conference, he told her in his typically offhand and condescending tone, “We have debts to settle as well.” I believe it was an opportunity lost by RW to explain through the media to the people why it makes perfect sense to dispose of the shares held in SLT, SLIC and LH.
In my opinion, when it comes to the economy and finance, most people in our country are ignorant. Many highly educated people and experts in their own field I know say, “I don’t know or understand finance.” In the last couple of years, we have seen greater discussion and information sharing on the economy and finance due to the economic crisis. However, there is still a lack of understanding and proper appreciation of the issues. The government must disseminate the policy through its media with greater focus and transparency. I have often been dismayed when RW and other government officials say, “The IMF has told us to do this and that”. Instead of passing the buck to the IMF, GOSL needs to say commonsense and financial prudence demands what we’re doing.
Why it’s sensible for GOSL
to sell its SLT stake
For me, the logic in selling the shares of profitable enterprises is evident on both financial and ideological grounds. In the case of SLT, the GOSL, through the Treasury and the Employees Trust Fund (ETF), currently own a controlling 50.9% of the company. A share of SLT trades presently at around Rs. 94 on the Colombo Stock Exchange. This means the company’s value is around Rs. 168 billion. Therefore the GOSL stake is worth around Rs. 86 billion.
However, the current market price of an SLT share is significantly overvalued due to the anticipated sale of the government stake. According to the company’s latest Annual Report, in the last 10 years up to the end of 2021, the highest price the share commanded was Rs. 57.30 in 2014. However, in 2022 the highest traded price was Rs. 78.90, whilst the lowest was Rs. 28.70. Obviously, an independent valuation would need to be carried out considering that a controlling stake is being sold. Several well-established methodologies are used in the valuation of companies.
To illustrate my point that it is beneficial for GOSL to sell out, I will assume Rs. 65 per share is the price the government will get on the deal. The GOSL would therefore be able to receive Rs. 59.7 billion by selling its SLT stake.
I have set out below the last five-year financial performance, capital expenditure and dividends paid to GOSL by the SLT Group.As can be observed, despite posting healthy profits, the dividends declared have been constrained by the high capital expenditure incurred. Given the rapid technological development and the ever-expanding use of mobile communication and the Internet, all telecommunication companies need to incur continuous capital expenditure to keep abreast.
The table shows the GOSL has only received total dividends of Rs 5.4 billion over five years, an annual average of Rs 1.1 billion a year.
So the question is whether retaining its SLT shares and earning Rs. 1 billion a year against receiving Rs. 59.7 billion as sales proceeds, is beneficial to the country or not. As stated by RW , the GOSL by selling could then utilize the Rs. 59.7 billion proceeds to retire some of its current debt and also not raise new loans as is currently done at interest rates above 20% plus. The interest saving for a year on the new debt at 20% would be Rs. 12 billion.
Opportunity cost is the criterion for making prudent financial decisions. The definition of opportunity costs is the value or benefit of what you lose or miss when you choose one alternative over another. In this instance, in case the GOSL does not sell its SLT stake at my assumed price of Rs. 65 per share, the opportunity cost foregone is Rs. 11 billion for a year.
The sale of SLT shares will not impact on our national security as the largest telecommunications operator in the country is a foreign-owned entity.
In 1997, the government, through a competitive bidding process, sold 35% of its shareholding in SLT to Nippon Telegraph and Telephone (NTT) of Japan for US$ 225 million. This was then the largest ever privatization transaction of GOSL.
The transformation of SLT under a Japanese CEO after partial privatization was immense and is often cited as an example of why SOEs should be privatized. The days when we had to wait nearly five years to get a new fixed-line connection were ended as SLT was transformed into a service-centric business enterprise. However, even after two decades, the Chairman of SLT, in his message to the shareholders in the 2021 Annual Report, laments, “In January 2020, we saw a company with immense potential, but its progress was obstructed in several areas. Staff unrest was at the top of the list with regular strikes and work stoppages leading to poor messaging (signalling) to the customers, especially the corporate sector.”
Staff remuneration cost at SLT versus its competitor
According to the latest Annual Report (AR), SLT employed 8,058 staff. In 2021 costing Rs. 20.7bn. wages. In contrast, Dialog Axiata Plc, its main competitor, with a significant market share (17.7 mn subscribers vs SLT’s 9.3 million) and revenue (Rs 142 Bn vs Rs. 102Bn) over SLT, employed only 3,631 staff with a total wage bill of Rs. 10 bn. The bottom line is that SLT incurs Rs. 10.7 bn staff costs over its competitor to service a subscriber base significantly lower than its rival. These figures reflect the cost inefficiencies at SLT and other SOEs and is the primary reason the trade unions vehemently oppose the sale of the GOSL stake.
Furthermore, Dialog Axiata Plc has stated in its Annual Report that they have invested US $ 3 Bn since inception. In 2021, they paid Rs 8.4 billion as direct taxes and collected Rs. 14.8 Billion as consumption taxes. Another benefit of privatization for the GOSL is that it stands to collect higher direct taxes from companies operating efficiently with a cost focus.
The logic I have applied to the sale of the SLT stake is equally applicable to the sale of the GOSL stakes in Lanka Hospitals and Sri Lanka Insurance Corporation.
We need to set aside, at least now, this long-held view that the government should be involved in controlling and operating businesses. The process of privatization is lengthy and, as can be seen, will meet various hurdles. However, the GOSL must be steadfast in its determination to go ahead with the planned privatization/restructuring process of SOEs and actively engage the public and educate them of the benefits.
Transparency and competitive bidding when Privatising SOEs
A mandatory requirement for privatization is that the process must be totally transparent and be based on competitive bidding. Furthermore, the base price/valuation for sale should be arrived at by an independent party so that they are no doubts that the GOSL and the people received the best possible deal.
The success of India
Sri Lanka should look across the ocean at India, which since 1991 has been following a strategy of Liberalization, Privatization and Globalization that has led to consistent economic growth; India is now considered a global economic powerhouse. A few years back, Prime Minister Narendra Modi said the government has no business to be in business, and his administration is committed to privatizing all PSUs barring the bare minimum, in four strategic sectors.
“It is the government’s duty to support enterprises and businesses. But it is not essential that it should own and run enterprises,” he said. Modi also said the Centre’s policy is to either monetize or modernize public sector enterprises on the basis that the government has “no business to be in business”.
(The views and opinions expressed in this article are of the author and are not of any institution or organization that he may be associated with.)
Features
‘Lord Edgware Dies’
It has been some time since I read an Agatha Christie, the plot of which I cannot remember. So, I was delighted to find on the shelves of a friend Lord Edgware Dies, which I had a vague memory of, but no certainty about who had done it.
When I read it, I found that my memory of who was probably the killer was correct, but I could not be certain and the red herrings Christie threw in were so diverting that until almost the very end I wondered if I had been wrong.
The plot is very simple. Jane Wilkinson, who is married to Lord Edgware, tells him that she is desperate for a divorce since she is in love with a very proper Anglo-Catholic peer, Lord Melton, but Edgware refuses to divorce her. She asks Poirot to talk to him, which he does, and is surprised to find that Edgware has told Jane he is prepared to give her a divorce. This was, after he had categorically refused, through a letter, which Jane said she had not received.
That night Edgware is murdered, after Jane had been to see him, or so the butler said, and also Edgware’s secretary. But Jane had been that evening at a grand dinner many miles away, where a dozen fellow guests could swear to her presence.
There was a solution however to the mystery of two Jane Wilkinsons, namely a skilful impersonator called Carlotta Adams who, in the opening chapter had impersonated Jane Wilkinson, who had also been at the performance. But when Poirot goes to see her, he finds that she had been found dead on the morning after Edgware had been killed, of an overdose. And in her bag was a gold case, with a strange inscription, that contained the drug, along with a pair of pince-nez.
Her maid said she had written a letter to her sister in America and posted it the previous night. Poirot asks Inspector Japp to get the letter, and a transcript is received from America, and in it the name of Edgware’s nephew Ronald Marsh is mentioned; he had taken Carlotta to dinner after her performance, with which the book opens, and had then set her a challenge. Japp arrests Marsh, but Poirot is not happy and asks for the original of the letter, which the sister sends him. That shows that a page is missing, and the tear is obvious, though that raises the question as to why it had not simply been cut.
Matters are further complicated by the fact that Marsh had gone in a taxi to the Edgware house, along with Edgware’s daughter Geraldine, in the interval of an opera which had previously seemed to provide them with cast iron alibis. Geraldine had gone in to fetch her pearls so that Marsh could raise money he needed, and thus had an opportunity to kill Edgware, as did Marsh, for the driver said he had got out of the taxi while waiting and gone into the house.
Marsh explained why he had gone to the house on the night of the murder as having followed Bryan Martin, an American actor, who had been in love with Jane, whom he saw go into the house with a key. But there was no one visible when he entered, and Geraldine almost immediately came down and they left together. And Martin too has become an object of suspicion to Poirot, for he had been to see him before the murders were discovered with a story of being followed by a man with a gold tooth – a story Poirot immediately realized was false when he was asked how old the man was, and was told he was young, for young people did not have gold teeth.
A heap of French money Edgware had got for a trip to Paris was missing, but since Marsh had no need for it after his cousin’s offer of help, Poirot deduces that it must have been taken by the butler, who has disappeared. Christie has stressed that he is astonishingly handsome, unusual in a butler, and Poirot notes a resemblance to Martin, so he thinks the mysterious man going into the house must have been him.
Incidentally, later Poirot assumes that Edgware’s change of mind was because he was involved in some scandal, and I believe Christie intends us to see the cause of this in his handsome butler, though this is not specified.
Meanwhile, Poirot has asked Japp to find out the provenance of the case found in Carlotta’s handbag, and it turns out to have been made in Paris, specially commissioned, and collected by a woman with pince-nez.
But then another murder occurs—that of another guest at the grand dinner, which provided Jane with her alibi. The victim is an actor who had been bemused when Jane, at a lunch, thought the Judgment of Paris referred to the city. He told Hastings he wanted to see Poirot, but was killed before he could get to the appointment. Poirot had rushed there when told about his request, but it was too late.
Meanwhile, Poirot has tried out the pince-nez on Edgware’s secretary, but she could not see through these. It was only a chance remark heard outside the theatre that led him to try them out on Wilkinson’s maid Ellis, a spare pair that had been appropriated for the night of the murders.
Poirot then lays things out, having summoned Martin and told him that he probably suppressed Edgware’s letter, as he had been dropped by then and he did not want Jane to marry another. But after teasing Martin, Poirot says that Jane was in fact the murderer, and she got Carlotta to impersonate her at the dinner while she went to the house and killed her husband. After meeting Carlotta later and checking with her through a call that she had
not been rumbled, Jane had gone ahead with the murder – she put veronal into her drink and the case with veronal into the handbag. She forgot to take out the pince-nez she had used earlier to imitate an American. Carlotta had registered as the American in a hotel and Jane had gone to see her, and there they exchanged identities. After seen the letter, she made use of it by tearing off the page that referred to her, and the S of She, so that the person who had challenged Carlotta to impersonate her seemed to be a man.
There is a coda in which Jane, condemned to death, writes to Hastings, still full of pride at her ingenuity hoping she will be remembered.
Features
Desilt reservoirs, learn from our ancient irrigation systems
by Prof. O. A. Ileperuma
Silting of reservoirs is a major problem today affecting our hydropower production and irrigation systems. The main Mahaweli reservoirs are silted to a considerable extent reducing the water holding capacity of them. Due to poor soil management practices, floodwaters deposit large amounts of silt in these reservoirs. When the Polgolla reservoir was fully drained about two years back, one could see mountains of silt in the lower reaches of the reservoir. A rough estimate is that 50% of the total capacity of these reservoirs has been lost to siltation. This is a serious issue which affects not only power and agriculture but also flood control.
Our ancient irrigation systems ensured that desilting of reservoirs took place under royal decree where all users of the reservoirs were ordered to carry out desilting of reservoirs during the dry season. The clay thus collected was used in making bricks for the construction of great stupas which dot the landscape of our ancient kingdoms. This ensured that the reservoirs had their full capacity filled with water for the next cultivating season. Our ancient kings were clever enough not to construct reservoirs by blocking main rivers such as the Mahaweli. A classic example is the Minipe left canal where they tapped only the surface water of Mahaweli. Even the bigger tanks such as Nuwara Wewa and Parakrama Samudraya were fed with minor rivulets. There were also other ingenious features in the cascade irrigation systems built by the ancient kings, such as mud sluice canals and forest reservations between the reservoirs in the cascade system. These reservations helped trap silt and remove excess nutrients, which could otherwise contribute to increasing salinity as water flowed from one reservoir to another.
- Parakrama Samudraya
- Kalawewa
- Kotmale
A classic engineering marvel is the former Yoda Ela, which carries water from Kalawewa to Nuwara Wewa and Tissa Wewa. It is 87 km long although the straight distance between these points is only about 40 km. The gradient of this canal is about 10 cm per km or 6 inches per mile. Yodha Ela functions as a moving reservoir and feeds about 4,600 hectares of paddy lands. It is a winding canal with about 120 smaller reservoirs on its way. It was constructed during the reign of King Dhatusena around 459 AD and later expanded by King Parakramabahu by connecting more reservoirs to the network. Unfortunately, during the Mahaweli project our modern-day engineers constructed a concrete canal replacing the winding path of this Yoda Ela also called Jaya Ganga. This effectively removed the ability of the old Yoda Ela to remove silt and nutrients. The bank of this Ela has wet zone trees such as jak and areca nut growing well. They take up the nutrients from the flowing stream making the water suitable for irrigation later.
Ancient Mesopotamian civilisations depended on dams constructed along the two main rivers, Euphrates and Tigris. After continuous irrigation of their fields over several thousand years, salinity of the irrigated lands increased making them unsuitable for agriculture. People died due to famine and this clearly illustrates the danger of blocking main rivers for agriculture. There is scientific evidence that the salinity of paddy soils in the Mahaweli C area is increasing.
We saw the devastation caused by Cyclone Ditwah. The sluice gates of the Kotmale Reservoir were opened, and Kandy and Peradeniya were flooded. If the reservoir had had greater storage capacity, couldn’t the opening of the gates have been delayed? This may not be an argument that modern-day engineers would readily accept, and I am not an irrigation expert. These ideas may well be naïve. But most of us tend to think of reservoirs mainly in terms of hydropower generation and irrigation, while their role in flood control receives much less attention. The question therefore deserves serious consideration. Could restoring lost reservoir capacity through desilting help improve our ability to manage extreme rainfall and reduce flood risks?
Desilting our reservoirs should be considered a national priority.
Features
Losing out to Ethiopia
Export diversification – Missing the wood for the trees – Part III
by Gomi Senadhira
In Sri Lanka, the word “Ethiopia” is often used as disparaging slang to describe individuals or areas experiencing extreme poverty, starvation, or severe economic hardship. This linguistic habit originated in the 1980s with the Western media coverage of the devastating Ethiopian famine of 1983-85. That media coverage shocked the world but also left an outdated and offensive global stereotype that the country is permanently starving. Much has changed since then. By now, with an annual growth rate of around 9%, it is the fastest-growing economy in sub-Saharan Africa. Ethiopia has also emerged as a highly competitive exporter and is challenging not only its competitors in the region but also countries like Sri Lanka. This article is on how Sri Lanka has lost ground to Ethiopia (and a few other countries) in the GCC markets for agricultural and floricultural products.
Sri Lanka – A Pioneer in the Agriculture and Floricultural Market in the GCC
As discussed in Part II of this article, by the mid-1980s Sri Lanka had established a strong foothold in the GCC’s fruit, vegetable, and floricultural market. Geographical proximity and well-established shipping and air links gave Sri Lanka a strong comparative advantage over Southeast Asian and African nations. Thailand, Vietnam, and Kenya were not even in the market. At that time, Ethiopia was experiencing (as BBC news reports described) “a biblical famine”.
The market was not very large, but it was lucrative and growing. Trade Minister Lalith Athulathmudali as well as the Chairman of the Export Development Board, Victor Santiapillai, who visited Kuwait (and the GCC countries), recognised the market potential for these products and encouraged us to continue with our work. The minister was particularly keen to further develop links between the market for these products, exporters, and his Export Production Villages (EPVs). So, it was becoming a successful case not only for export diversification but also for transferring gains from exports directly to rural households.
From Trailblazer to Tailender
As a result, even by the beginning of this century Sri Lanka had a larger market share than most of its competitors from Asia or Africa. But since then, our competitiveness has weakened significantly. The tables below provide a comparative snapshot of Sri Lanka’s performance vis-à-vis Thailand, Vietnam, Kenya and Ethiopia in the GCC market for vegetables, fruits and floricultural products. As illustrated therein, in 2001 Sri Lanka was ahead of Thailand, Kenya and Ethiopia in this small but rapidly growing market. Since then, we have fallen behind Thailand, Kenya and many other countries in that lucrative market. If this trend continues, Sri Lanka will fall behind Ethiopia within the next few years. (See Table 1)
In the GCC market for vegetables (covered in HS chapter 07), Sri Lanka was ahead of most other competitors in 2001. As illustrated in Table 1 , Sri Lanka had failed to develop this market, while Thailand, Kenya, and even Ethiopia had very efficiently increased their market shares. The GCC is a market to which Sri Lanka can supply some vegetables, like cabbages, by sea. It appears Sri Lanka had also failed to exploit this mode of supply.
We can see a similar trend in the market for fruits. Vietnam, Kenya, and Thailand have emerged as major players, while exports from Sri Lanka have staggered on slowly. In this segment, Vietnam has emerged as a leading player during the last twenty years and the GCC imports from Viet Nam have shot up from US$44 thousand in 2001 to US$346 million by 2024. In part one of these articles, I discussed the remarkable increase of jackfruit exports from Vietnam “…just $3 million in 2015 to an impressive $236.8 million in 2023” while most of our jackfruit production rots under the trees. This explains how countries develop their markets, geographically and product-wise. (See Table 2)
Sri Lanka’s performance has been weakest in the market for floricultural products (HS Chapter 06), which groups live trees, cut flowers, and ornamental foliage. When we first entered the market in the 1980s, the market was dominated by the Netherlands, and Kenya and Ethiopia were not even in the market. At that time, we identified the Gulf states as a market where Sri Lanka could have a dominant presence due to geographical proximity. Even in 2001, Sri Lanka was ahead of Kenya, Ethiopia, and Thailand. But by now, Kenya has emerged as the dominant supplier. Ethiopia is also expanding its market share and is the third-largest exporter. (See Table 3)
Missing the Wood for the Trees
In the mid-1980s, Sri Lanka first established its foothold in the GCC market. Since then, Thailand, Vietnam, Kenya, and even Ethiopia have moved well ahead of us and have become leading players. Why did we lag behind in our export diversification efforts in general and, more particularly, in the GCC market?
The reasons are very clear. After the initial attempts in the 1980s and early 1990s, Sri Lanka has not been proactively involved in identifying, developing, and promoting new products and markets, or protecting and further developing new markets already established. The focus has simply been on traditional exports: tea, coconut, cinnamon, and garments, while other products were almost ignored. In essence, we have been and continue to focus intensely on a narrow group of products and markets, and we have lost sight of the bigger picture.
(The writer can be reached at senadhiragomi@gmail.com)
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