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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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Parliament rejected two anti-corruption proposals

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Ex-COPE Chairman makes another revelation:

By Shamindra Ferdinando

Parliament has blocked two specific proposals made by MP Prof. Charitha Herath in his capacity as the Chairman of the Committee on Public Enterprises (COPE) to enable the Parliamentary Watchdog Committee to engage the Attorney General in high profile corruption cases, directly.

SLPP National List MP Herath lost the COPE Chairmanship with the prorogation of the Parliament on 28 July by President Ranil Wickremesinghe. The prorogation results in suspension of all business before the House and quashed all proceedings pending at the time, except impeachments.

Prof. Herath told The Island yesterday (25) that in consultation with Auditor General W. P. C. Wickremaratne, he had requested for the modification of Standing Orders 120, several months back, to permit the COPE to call for Attorney General’s interventions as and when necessary. If that was not acceptable, Parliament should approve specific requests made by him on behalf of the COPE, he suggested.

Prof. Herath said that the alternative, too, has been rejected. Responding to another query, he said that he had submitted the proposals to the Parliamentary Committee on Standing Orders. The Committee consists of nine members, including the Speaker, the Deputy Speaker and the Deputy Chairman of Committees.

Appearing before the Parliamentary Committee on Standing Orders, Prof. Herath also suggested that if proposals submitted in writing weren’t acceptable then at least a representative of the Attorney General should be allowed to participate in the COPE proceedings. That proposal too was turned down.

Prof. Herath said that the rejection of specific measures to address corruption accusations should be examined against the backdrop of the economic fallout of waste, corruption, irregularities and mismanagement of the national economy as well as the unprecedented recommendation by the United Nations Human Rights Council (UNHRC) to investigate economic crimes that impact on human rights and the tracing and recovery of stolen assets.

Prof. Herath alleged that the Parliament should be seriously concerned over the Geneva intervention especially because the country was seeking immediate assistance from the International Monetary Fund (IMF). Asserting that the situation was so grave that even USD 2.9 bn loan facility spread over a period of four years couldn’t revive the national economy, Prof. Herath emphasised that streamlining of public sector enterprises was a prerequisite for the economic recovery process. Therefore, corruption had to be curtailed by taking tangible measures, he said.

Prof. Herath said that though the particular Standing Order had been amended it didn’t meet their aspirations. What has been approved by the Parliament was inadequate to meet the growing threat posed by influential racketeers, the outspoken MP said. Prof. Herath has closed ranks with the dissident SLPP group, led by Party Chairman Prof. G.L. Peiris, and Dullas Alahapperuma. Other members of the group are Prof. Channa Jayasumana, Dr. Nalaka Godahewa, Dilan Perera, Dr. Upali Galappatti, Dr. Thilak Rajapaksa, Lalith Ellawala, K.P. S. Kumarasiri, Wasantha Yapa Bandara, Gunapala Ratnasekera and Udayana Kiridigoda.

Prof. Herath said that as the SLPP declined to allocate time for members of the rebel group, he was compelled to obtain five minutes from the Opposition to take up the issue in Parliament.Appreciating Opposition Leader Sajith Premadasa and Chief Opposition Whip Lakshman Kiriella for giving him the opportunity, Prof. Herath pointed out how a carefully prepared set of proposals to strengthen the COPE had been rejected.

Prof. Herath stressed that the intervention of the COPE was required as the Secretaries to the Ministries often failed to proceed with the instructions issued to them. The MP found fault with section 3 and 4 of Standing Orders 120. Declaring that though the Parliament was routinely blamed for its failure to arrest corruption, MP Herath said that Members of Parliament weren’t aware of what was going on. He also called for the strengthening of Standing Orders 119, 120 and 121 that dealt with the Committee on Public Accounts (COPA), COPE and the Committee on Public Finance (COPF), respectively.

MP Herath declared in Parliament that the crux of the matter was that those appointed members of the Cabinet represented the interests of the Executive and thereby undermined the very basis of the responsibilities of the House. The undeniable truth was that the Cabinet ministers didn’t represent the interests of the Parliament. “In other words, they worked against the collective responsibility as members of Parliament to ensure financial discipline,” MP Herath said, pointing out that in some countries the lawmakers were not entrusted with the task of decision-making.

Referring to Executive Sub-Committees to be established, Prof. Herath emphasized the pivotal importance of recognizing their responsibilities. If they were answerable to the Executive there would be serious consequences pertaining to the parliamentary system. Executive Sub-Committees shouldn’t be at the expense of the Parliament, the MP said, underscoring the responsibility of the part of all political parties represented in Parliament to take immediate remedial measures.

The rejection of the COPE proposals meant that the Parliament,as an institution hadn’t been sensitive to the recent public upheaval that forced Gotabaya Rajapaksa, elected with a staggering 6.9 mn votes to give up the presidency and literally flee for his life.

Ranil Wickremesinghe, who had been elected by Parliament to complete the remainder of the five-year term secured by Gotabaya Rajapaksa, and the SLPP, hadn’t realised the need to introduce urgent reforms, the MP alleged.Prof. Herath also questioned the rationale behind setting up of the National Council when the powers that be deprived the existing mechanisms required power to achieve their objectives.

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AHP asks President RW to be wise gazette-wise

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The Academy of Health Professionals (AHP) has called on President Ranil Wickremesinghe to learn from the mistakes of his predecessor and refrain from issuing gazettes, one after the other, and then reverse them in order to prevent worsening of the crisis situation prevailing in the country’s health sector.

AHP President Ravi Kumudesh, has, in a letter to President Ranil Wickremesinghe, said that the country’s health sector is in the present situation as the former President and the Health Minister allowed themselves to be manipulated by a coterie of officials. “We call on the President not to become another ruler who reverses gazettes and to assess the practicality of the proposals put forward by his advisors before gazzetting them. One such cause for the downfall of the health sector was former Health Ministers playing with the retirement age. As a result, there are many senior officials holding top offices of the health sector despite the fact that all of them are above the age of 60 years. If any official is given a service extension for an office in a health sector position, then it should be given only for a six-month period with the specific objective of training one of his qualified subordinates for that particular position.

 During that period, the official who is given the service extension should not be sent abroad for training or further education. Many officials, who are over 60 years of age, had been given service extensions and were found given foreign trips for capacity building. The irresponsible human resource management in the public sector is one of the main concerns that has been raised by the International Monetary Fund when assisting this country,” Kumudesh has said in his letter.

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BASL contemplates legal action against HSZ gazette

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The Bar Association of Sri Lanka (BASL) has threatened legal action against President Ranil Wickremesinghe’s reintroduction of war-time high security zones (HSZs).

“The BASL will be carefully studying the provisions of the said order and take appropriate legal action to ensure that the Fundamental Rights of the people are secured,” the BASL has said in a statement.

The BASL has said it is concerned that the purported order of the President also seeks to create offences under the said order which are not found in the Principal Act.

Full text of the statement: The Bar Association of Sri Lanka (BASL) is deeply concerned at the declaration of certain areas in Colombo as High Security Zones under Section 2 of the Official Secrets Act No. 32 of 1955 by President and Minister of Defence Ranil Wickremesinghe.The said order appears to cover several areas in the Colombo District including the areas in Colombo ordinarily used by the members of the public. It also covers several areas in Hulftsdorp in the vicinity of the Court premises.

The said order by the President purports to prohibit public gatherings or processions whatsoever on a road, ground, shore, or other open area situated within such High Security Zones without the permission of the Inspector General of Police or a Senior Deputy Inspector General. It also prohibits the parking of vehicles within the zone unless reserved for parking by the Competent Authority or under a permit issued by him, such Competent Authority being the Secretary to the Ministry of Defence.The scope of the Official Secrets Act is clearly set out in Section 2 of the said Act which can be read at: https://www.lawnet.gov.lk/official-secrets.4/

What Section 2 of the Official Secrets Act enables the Minister, is to declare any land, building, ship, or aircraft as a prohibited place. The Act does not empower the Minister to declare large areas as High Security Zones.The objective of making an order under Section 2 of the Official Secrets Act is to better safeguard information relating to the defences of Sri Lanka and to the equipment, establishments, organisations, and institutions intended to be or capable of being used for the purposes of defence. Orders under Section 2 cannot be made for any other purpose.

The BASL is concerned that the purported order of the President also seeks to create offences under the said order which are not found in the Principal Act. It is also of utmost concern that the purported order imposes stringent provisions in respect of bail by stating that a person taken into custody in connection with an offence under the said orders shall not be granted bail except by a High Court. The Official Secrets Act contains no such provisions, and in fact Section 22 of the Act empowers a Magistrate to release a suspect on Bail. As such the purported order seeks to significantly curtail the liberty of the citizen, without any reasonable or legal basis.

The BASL is deeply concerned that under the cover of the purported order under Section 2 of the Official Secrets Act that there is the imposition of draconian provisions for the detention of persons who violate such orders thus violating the freedom of expression, the freedom of peaceful assembly and the freedom of movement all of which are important aspects of the right of the people to dissent in Sri Lanka

The BASL will be carefully studying the provisions of the said Order and take appropriate legal action to ensure that the Fundamental Rights of the people are secured.We continue to remind the authorities including the President of the wisdom found in the Judgment of the Supreme Court in the ‘Jana Ghosha’ case of Amaratunge v Sirimal and others (1993) 1 SLR 264 which states as follows:

“Stifling the peaceful expression of legitimate dissent today can only result, inexorably, in the catastrophic explosion of violence some other day.”

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