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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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Mahara prison riot: four killed, 26 injured

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Condition of some inmates serious

Rioters attempt arson attack

Exact number of deaths not known

Situation under control – police

At least four inmates were killed and 26 others injured, yesterday evening, when officers opened fire during a riot in the Mahara prison. It was not clear how many had died, but four bodies were taken to the Ragama Hospital, according to sources.

The condition of some inmates was serious, a senior doctor treating the injured told The Island.

Police headquarters said law enforcement units including the Special Task Force had been deployed in support of the prisons guards.

The situation had been brought under control by yesterday evening, the police said, adding that inmates had caused disturbances over the spread of COVID-19 in their prison.

The riot erupted when inmates learnt that there was a surge in infections in the prison, and dozens of them had tested positive for COVI-19.

Most inmates wanted to be taken to treatment centres, making it difficult for the prison guards to control them.

The inmates turned aggressive and attempted an arson attack.

A fire was reported from the prison last night.

So far, over 1,000 corona positive cases have been reported from the prisons.

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SLPP constituent hands over far reaching proposals

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New Constitution making process underway

By Shamindra Ferdinando

Deputy Leader of the breakaway JVP faction-National Freedom Front (NFF) Jayantha Samaraweera, yesterday (29) told The Island that his party recently submitted 23 proposals to the nine-member expert committee appointed by the Cabinet of Ministers to draft a new Constitution.

President’s Counsel Romesh de Silva leads the expert committee, named in early September, this year.

The proposals consisted of what shouldn’t be included in the new draft Constitution under any circumstances, what should be retained from the current Constitution, sections that needed to be rectified, executive presidency and electoral reforms, the Kalutara district lawmaker said.

State Minister Samaraweera said that he had posted the NFF’s set of proposals to the committee after an attempt to hand it over personally to Room No 32 (Block 2) of the BMICH, where the committee is located, failed last Thursday (26).

Samaraweera was accompanied by General Secretary of the party S. Wijesiri, politburo member Nimal Piyatissa, MP and Uddika Premaratne, MP. A constituent of the SLPP (Sri Lanka Podujana Peramuna), the NFF group in the 145-member government parliamentary group is represented by six members.

 Responding to a query, State Minister of Warehouse Facilities, Container Yards, Port Supply Facilities and Boats and Shipping Industry Development Samaraweera said that their proposals reflected the aspirations of those who voted for Gotabaya Rajapaksa and the SLPP led coalition at the 2019 presidential and 2020 parliamentary polls, respectively.

The expert committee consists of Romesh de Silva, PC, Gamini Marapana, PC, Manohara de Silva, PC, Sanjeewa Jayawardena, PC, Samantha Ratwatte, PC, Prof. Naseema Kamurdeen, Dr. A. Sarveshwaran, Prof. Wasantha Seneviratne and Prof. G.H. Peiris.

Justice Minister Ali Sabry, PC, assured Parliament late last October that the government would present the draft of the proposed Constitution to the House within one year. The assurance was given during the debate on the second reading of the 20th Amendment to the Constitution on Oct. 22.

Responding to another query, the State Minister said the proposed new Constitution should ensure the country’s stability, protect the unitary status, thwart the separatist agenda, protect Buddhism, guarantee human rights of all, protect archeological heritage, food security and non-aligned foreign policy.

SLPP Chairman who is also the Education Minister Prof. G.L. Peiris yesterday told The Island that the party was ready to swiftly respond to the expert committee if it sought to ascertain their views on any matter in respect of the draft constitution. Prof. Peiris emphasized that President Gotabaya Rajapaksa and the SLPP received two massive mandates at the presidential and parliamentary polls to bring in a new Constitution. Well informed sources told The Island that the committee was trying to meet the original deadline to finish the assignment within six months. Therefore, the committee was planning to finalize the document ahead of Sinhala and Tamil New Year. Recently the Justice Ministry extended the time to accept proposals till Dec 31, 2020. Sources said that the committee so far hadn’t received proposals from any major political party. Perhaps, NFF proposals had been delayed in the post, sources said, adding that attorney-at-law Nagananda Kodituwakku too had sent his proposals. The committee has sought views from interested parties on the (1) nature of the state (2) fundamental rights (3) language (4) directive principles of State Policy (5) the executive, cabinet of ministers, the public service (6) the legislature (7) franchise and elections, including referendum (8) decentralization/devolution of power/power sharing (9)the judiciary (10) public finance (11) public security and any other matter not specifically referred to by the Justice Ministry. In spite of the eruption of the second devastating covid outbreak in early Oct that hindered the expert committee, it could make progress thanks to Zoom technology, sources said. Progress had been made, sources said adding that recently face to face meetings resumed.

The NFF Deputy Leader said that they suggested to the expert committee that the authority to introduce laws should be the prerogative of parliament and under no circumstances should such powers be granted to administrative structures at provincial or district level. The NFF also proposed that special laws should be formulated to cater to the needs of any community, constitutional guarantee that administrative structures shouldn’t be named, changed or amalgamated in terms of particular ethnicity and an elected government should function as caretaker not as the owner and the right of the public should be held over the right of an individual as well as constitutional guarantee to protect the national wealth for future generations.

Lawmaker Samaraweera said that the NFF also proposed that the country shouldn’t enter into agreements contrary to non-aligned foreign policy and not allow any foreign power to use Sri Lanka territory for military purposes, transparency in foreign trade agreements, constitutional measures to prevent dual citizens from contesting the Presidency, entering parliament, commanding armed forces, IGP, Attorney General, Governor Central Bank, diplomatic posts and serve as Court of Appeal or Supreme Court judges.

The MP said altogether 23 proposals were made and the NFF expected the expert committee to give them due consideration. Samagi Jana Balavegaya Leader Sajith Premadasa couldn’t be contacted for his party’s position on the new Constitution making process. Fifteen political parties represent the current parliament. Nine of them have just one MP in parliament.

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Final decision on GCE O/L exam, this week – Prof. GL

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Education Minister Prof GL Peiris told Parliament, on Saturday, that the final decision on whether the GCE O/L examination would be held as scheduled would be made public within one week.

Responding to a question raised by Kurunegala District SLPP MP Shantha Bandara, Minister Prof Peiris said that schools in Colombo, Gampaha, Kalutara districts, and the areas under lockdown in other districts had been closed owing to the COVID-19 pandemic. “The reopening of these schools depends on the advice of health authorities. The most important thing is saving the children from the pandemic. If this situation lasts more than one week or two we may not be able to hold the examination as scheduled from Jan 18 to 27 next year.”

Prof. Peiris said the situation would be reviewed this week and a decision taken thereafter. “It will be unfair by some students to make them sit the examination while their schools are closed,” the Minister said.

Minister Prof Peiris said that of the 10,165 schools countrywide only 5,100 remained open at present.

MP Bandara said that many talented children missed their opportunity to compete in national school games owing to the school closure and asked whether they would get that opportunity.

Prof. Peiris said that the matter had been discussed with the relevant authorities, who held that it was not still safe to conduct sports events in the country due to the health emergency.

The Minister said that the government was thankful to the principals and teachers who had helped conduct the GCE Advanced Level examination and the Grade Five Scholarship examination successfully. Within 33 days of the Grade Five scholarship examination, the results could be released in record time for the first time. The teachers had rendered a dedicated service. Currently, between 90 to 95 percent of teachers reported to work in schools in areas that were not under lockdown. They render a remarkable service amidst great difficulties.”

Prof Peiris said the government spent Rs 137,340.3 million on teachers’ salaries, and admitted that there were salary anomalies, which had to be rectified. “We have referred the matter to the National Salaries and Cadre Commission and decided to pay an interim allowance to the teachers until that matter is solved. The Cabinet has approved this, and the Treasury Secretary has informed us that the payments could be made. Teachers will get that allowance very soon.”

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