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Can revival of SOEs create the opportunity to alleviate the crushing debt burden?

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Pathfinder Economic Alert: Proposal for budget speech

The Government of Sri Lanka has announced that it will implement reforms and strategies to revive state-owned enterprises (SOEs), while maintaining its policy decision to discontinue privatisation. Effective implementation of the proposed reforms would increase the value of SOEs. An important issue to be addressed is whether this creates an opportunity to raise financing for alleviating the country’s onerous debt burden. The crushing effects of this debt burden on the people of this country has been demonstrated by the constrained response of the Government in protecting people and livelihoods during the pandemic.

Sri Lanka’s fiscal stimulus as a percentage of GDP has been significantly lower than comparable countries. The Central Bank and a well-capitalized banking system have been able to step into the breach. However, the impact of the burden imposed on the capital adequacy of the banking system will only be known after the moratoriums are lifted. The Government’s success in containing the pandemic (March – September 2020) was a major positive factor in coping with its unprecedented effects, particularly through the early opening up of the economy.

This note argues that the Government’s efforts to reform SOEs creates an opportunity to address the onerous debt burden by selling public assets. Where the Government intends to retain control, it can consider selling minority stakes. However, there is a strong case for the sale of assets like the Hilton and Hyatt hotels once market conditions become more favourable. The emergence of a vaccine that is 90 percent effective is likely to accelerate the bounce back of the hotel and tourism sector

The Government is seeking to introduce a holistic programme of reform for improving the management of SOEs. In doing so, there is merit in drawing on the Statements of Intent (SOIs) drawn up by the major SOEs in recent years. The current initiative is pushing for the professionalization of the management of SOEs through rigorous recruitment schemes and capacity building in order to promote prudent decision-making and operational efficiency. The upgraded management teams will be called upon to develop medium-term strategic plans which identify growth strategies, including through business process engineering, mergers and amalgamations. These new business models are expected to respond to emerging opportunities in the post-pandemic world and meet challenges particularly in relation to logistics and supply chain resilience. Each SOE will also be expected to develop robust key performance indicators. In addition, monitoring mechanisms are to be established at the line ministries and Treasury.

An important gap in the proposed reforms relates to pricing policy. The largest proportion of the losses incurred by SOEs is attributable to pricing policy. Economic services (CPC, CEB, SLTB, SLR and NWS&DB) are provided below cost. There is a considerable body of empirical research which demonstrates that such subsidies are a very inefficient means of supporting the poor and vulnerable. In practice, they tend to benefit higher income groups disproportionately. It is more effective to provide a social safety net through a well-designed and targeted income transfer scheme. The highly inefficient (poorly designed and poorly targeted) Samurdhi Programme should be reformed to achieve this objective. This would provide greater leeway for adopting pricing policies that do not impose an unsustainable burden on the Government Budget and /or balance sheets of state banks. The current subsidy-based model of delivering economic services is no longer affordable given the highly constrained fiscal space and the debt dynamics which threaten the well being of the people.

The Pathfinder Foundation is concerned that the lack of fiscal space and the possibility of a debt crisis highlights the unsustainability of the Government being the employer of first resort. Sri Lanka’s post-colonial history involves the commitment of successive governments to creating unproductive public sector employment. However, the current highly constrained fiscal space calls for a radical re-think of the traditional approach of the Government being the employer of first resort. Historically, successive governments have been unwilling or unable to introduce economic reforms that would increase gainful employment outside the government sector. For SOE reforms to be effective, there should be complementary policies which generate productive employment opportunities thoughout the economy.

 

The Way Forward

The agenda for reforming SOEs includes the following: improved corporate governance; appointment of competent CEOs; recruitment of qualified professionals for procurement, finance, human resource development and other key management positions; adoption of realistic pricing policies and investment strategies; institutionalizing performance audit and financial management controls; and expenditure management. Success depends on taking tough decisions. It is noteworthy that governments, such as Norway and Abu Dhabi, have refused to provide additional financial support to their national airlines even though these two jurisdictions have two of the largest sovereign wealth funds in the world. Yet Sri Lanka, despite its parlous public finances, has not been able to take tough decisions in relation to its national carrier.

Successful implementation of SOE reforms will reduce the burden on the budget and strengthen state bank balance sheets. In addition, the valuation of these enterprises will be enhanced and the opportunity will be created to consider very seriously how a programme of asset disposal can contribute to alleviating the unsustainable debt burden. This course of action would be a less painful option for the general public than raising taxes or cutting priority expenditure.

Consideration should be given to categorizing state-owned assets into those which can be sold outright, such as the Hilton and Hyatt hotels. A second category could be assets which can generate considerable financing for the Government through the sale of minority stakes. For instance, the sale of 10-15 percent of the Bank of Ceylon and People’s Bank would generate a considerable amount of money. Part of this can be allocated to the employees of the institutions. Furthermore, if these stakes are sold through the stock market, the listing regulations would result in disclosure requirements which would improve corporate governance. There could be a third category of public assets for which the Government can decide there should be no change in ownership structure.

A separate vehicle can be created (similar to a sinking fund) into which the sale proceeds can be credited. These funds can be earmarked solely for the purpose of debt-management. The timing of such transactions should be determined by the improvement in market conditions. It would be timely to commence thinking about such an initiative at a time when sentiment and confidence, at home and abroad, is being boosted by the emergence of a vaccine which is over 90 percent effective.

The Pathfinder Foundation believes that the Budget Speech (Nov 17, 2020) provides an opportunity for the Government to elaborate on such a programme which offers the prospect of reducing the debt burden in a manner that contains the pain inflicted on the people of Sri Lanka. Such a programme will also transmit a positive signal to investors and creditors, both at home and abroad, as well as to rating agencies thereby increasing the credit worthiness of the country.

This is a PATHFINDER ALERT of the Pathfinder Foundation. Readers’ comments are welcome at www.pathfinderfoundation.org



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COPE discovers fake documents covering drug imports in 2022/23

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The Parliamentary watchdog Committee on Public Enterprises (COPE) has found that there were fake documents regarding the importing of medicines under the emergency procurement system in 2022 and 2023.

This was revealed during a COPE meeting held at Parliament probing the transactions of the National Medicine Regulatory Authority (NMRA).

NMRA CEO Saveen Semage told the committee that several fake documents have been found due to the lack of registration of medicines.

Stating that six such fake documents were found last year alone, Semage said he had recorded statements regarding each of the documents with the Financial Crimes Investigation Division.

He revealed that, however, no investigations have been conducted yet into the incidents.

“We have documents with confessions from a woman accepting that fake documents had been made. However, a statement has not even been recorded from that woman yet,” he said.

Meanwhile, COPE member MP Asitha Niroshana Egoda Vithana also revealed that the highest number of waive-off registrations (WOR) for medicines had been obtained in 2022 and 2023.

He said 656 such WORs had been obtained in 2022 and 261 in 2023, adding that this proves that discrepancies have taken place during the emergency procurement of medicines during these periods.

Furthermore, Deputy Director General of the Medical Supplies Division of the Health Ministry, Dr. G. Wijesuriya said discussions are underway on allowing the State Pharmaceutical Corporation (SPC) to directly import essential medicines.He pointed out that it was essential to take a policy decision in this regard as a solution to mitigate such discrepancies.

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Batalanda report tabled in parliament, forwarded to AG

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Bimal Ratnayake

The Batalanda Commission report was tabled in Parliament on Friday by the Leader of the House and Transport Minister, Bimal Ratnayake.

Minister Ratnayake announced that the government has decided to forward the report to the Attorney General for legal advice. Additionally, a Presidential Committee will be appointed to provide guidance and recommendations on how to proceed with the findings of the report.

Ratnayake said that the Cabinet of Ministers, along with President Anura Kumara Dissanayake, has made a policy decision to take necessary action in response to the report. He reassured the public that steps are being taken to ensure that such a dark chapter in the country’s history is never repeated.

Minister Ratnayake said that a two-day debate on the Batalanda Commission report will be scheduled in Parliament at an appropriate time, allowing for a detailed discussion on the report’s findings and recommendations.

The report, which will be printed in all three official languages—Sinhala, Tamil, and English—will be made available to the public in the near future. Ratnayake confirmed that printed copies would be provided to members of Parliament as well as the general public for their review.

The Leader of the House further revealed that there are 28 evidence volumes associated with the commission’s work, which will be submitted to Parliament at a later date for further scrutiny.

Ratnayake said that as entire country concerned of the Batalanda Commission’s findings, the government’s commitment to addressing the issues raised and preventing future atrocities stands clear. The next steps, including legal action and policy recommendations, will be shaped by expert advice and informed parliamentary discussions, he said.

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CB Governor stresses need to assist crisis-hit construction industry

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Governor of the Central Bank Dr. Nandalal Weerasinghe on Friday (14) emphasized the importance of promoting a sustainable and cost-effective construction industry in the country, highlighting key challenges and opportunities in the sector.

Speaking at ‘Construction Expo 2025’, Dr. Weerasinghe underscored the need for Sri Lanka to align with global trends in sustainable construction, integrating cost-effective energy solutions and eco-friendly building practices.

“I must say my views here are not necessarily as Governor of the Central Bank of Sri Lanka, but as a person looking at this construction industry and how this can be developed and what the issues are. Sustainability in construction is essential, not just for new projects but also for existing buildings,” he noted.

Dr. Weerasinghe acknowledged that the construction sector has been one of the hardest-hit industries due to multiple economic pressures in recent years including the decline in public investments, high material costs and the industry being dependent on government projects.

The CBSL Governor, who acknowledged that the government faced fiscal constraints, limiting infrastructure spending and delaying payments to contractors, said that however, the outstanding arrears had now been settled.

“Government did not have space to spend money for public investment, especially construction that had a significant impact on the industry in the last couple of years, plus the government inability to pay the arrears for a long period. That was an issue we all recognize that has been one of the adverse impacts the industry had in the past”, he expressed.

“Also the cost of materials went up significantly, partly because of foreign exchange shortages. As a result, the shortage had shot up the prices of construction materials, as well as depreciation of the currency, high interest rates, finance costs, and other factors. We all recognize that it had an adverse impact on the industry. It’s one of the worst affected industries because of all these factors.”

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