Stemming SOE losses | Sunday Observer

Stemming SOE losses

Ravi Abeysuriya
Ravi Abeysuriya

State Owned Enterprises (SOEs) which have become a huge loss to the economy should be turned around to contribute to the country’s growth and there needs to be a special emphasis on the operating mechanism to ensure its progress is achieved in the near future, an industry expert said.

“One of the most sensible methods to introduce proper governance practices to SOEs is to list them on the Colombo Stock Exchange. All listed companies are mandatorily required to implement comprehensive corporate governance practices and fit and proper criteria for directors in line with international principles such as G20/OECD Principles of Corporate Governance. Set strict guidelines for Board composition and appointment of non-executive independent directors through a nominating committee process. The All Or Nothing (AON)block method can be a medium through which strategic stakes of 10% to 20% of SOEs can be listed through a competitive, fully transparent and open bidding process over 3 market days to achieve the optimum price to address the public outcry against state owned assets being sold at a substantially undervalued price. It should be clearly understood that listing 10 to 20% of stake of SOEs does not constitute relinquishing state ownership nor privatisation as being construed by misguided citizens,” Condor Group CEO/Director Ravi Abeysuriya said..

According to the Advocata report, for the period 2006 to 2015 the cumulative loss of 55 strategically important SOEs amounted to Rs. 636 billion, which amounts to Rs.31,750 per citizen. Bank borrowings by these SOEs stood at Rs.471.2 billion as at end 2014, thus crowding out the private sector and citizens having to pay high interest rates when they borrow. Between 2009 and 2014 the number of SOEs grew from 107 to 245 while the number employed grew from 140,500 to a staggering 261,683.

“Whatever regime is in power, SOEs continue to incur enormous and persistent losses and the citizens unknowingly pay for these losses unless they realize their folly on trusting politicians and their empty promises. Even the poorest person has to pay Rs.181.60 on 15% VAT per year for the infant milk packet they buy for their child to recover losses incurred by SOEs,” he said.

(The average annual spending on infant milk powder was Rs.1,210.68 according to the 2016 household income & expenditure survey).

All stakeholders including the citizens, politicians and the media should take the blame for the current pitiful state of SOEs and failing to play their respective roles. A majority of citizens having seen so-called privatisation of some SOEs done in the wrong way (giving them to political henchman at highly undervalued prices and having lost jobs) are generally against privatisation. The politicians have cleverly misled the citizens to believe that state ownership is for public good without addressing the core issues. The need of the hour is to stem the bleeding in SOEs and bring in private sector governance and management practices to SOEs whilst continuing state ownership. Even profit making SOEs could improve their performance substantially if the governance issues in SOEs are addressed, he said.

The SOEs in Sri Lanka suffer three basic economic problems. The first is the Principal-Agent Problem. The second is the Adverse Selection Problem that relates to the bad choices made by the Government. The third is the problem known as the Moral Hazard Problem. The only way forward to stem the losses of SOEs in the long-term is to address these governance issues. The citizens keep appointing new governments believing in the promises made by politicians that the status quo will change.However, successive Governments have largely failed to tackle the problem.

The Principal-Agent Problem arises when the citizens (shareholders in the case of a private company) as principal or owners have no control over the agents that is the chairpersons and board of directors appointed to run these SOEs. The situation gets even more complicated (compared to a private company), as it is the Minister in charge of the SOE (Second Agent) that appoints the Chairpersons and Board of Directors of a SOE. Once appointed, these agents maximise their own personal benefits by spending the funds of SOEs on political tamashas, obtain products and services from related parties at exorbitant cost to the SOEs, basically robbing the citizens discreetly. Unfortunately, the mechanisms to restrain the agents who misbehave such as the appointing of a Finance Ministry representative to the Board, getting the Auditor General to audit the financial records and reviewing the performance of SOEs by a Committee on Public Enterprises (COPE) (people’s representatives on behalf of the citizens) have been ineffective in looking after the citizens interest. The Principal-Agent Problem is minimized in private companies by exercising an effective supervision by Principal (shareholders) on the Chairpersons and the Board of Directors, he said.

Adverse selection Problem in SOEs, occurs since the Chairpersons and Board of Directors and top managers of public enterprises are not selected based on merit, suitability, competencies and integrity by an independent process to run SOE effectively and efficiently. It is no secret that except for a very few, most of the appointments as Chairpersons and Board of Directors of SOEs are political henchman who are friends and family members of politicians. These people only need to have political loyalty and not competencies to get appointed to SOEs and will continue to take part in politics purely for the purpose of remaining in their positions being ‘yes’ people, who will not challenge the wrong doings/poor decisions as they are altogether incompetent.

The Moral Hazard Problem in SOEs, occur when the Chairpersons and Board of Directors, management and employees of a public enterprise do not make any effort to run an enterprise efficiently because they know that the Government will come to their rescue, when their capital is eroded due to continuous losses. They know that there is no risk of losing jobs due to the closing down of the SOE. A private company will not tolerate poor performance by its Chairperson and Board of Directors and nor will it leave room for them to engage in moral hazard practices for long. In the very first instance, these deficiencies are brought to light, the principals (shareholders) will call upon them to leave the company.

The solution to addressing SOE governance issues in the long term lies in establishing a proper nomination process for the appointments and carefully screening who gets appointed as Chairpersons and Board of Directors of SOEs, similar to the private sector governance principals. What is required primarily is public awareness about the political theft that is going on and to bring in a high standard of governance to SOEs.

The Report of the Committee appointed by the National Human Resources Development Council (NHRDC) to ‘Explore New Ways of Working in the Public Sector ’lay down the changes required in the governance structure, if Sri Lanka is to get out of this situation. Most politicians will not want to pay heed to the implementation of these proposals, as they will lose their ability to amass large amounts of funds they need to win elections and look after their henchman after winning an election, he said.

The NHRDC proposals suggest that appointments of Chairpersons and Board of Directors of SOEs should be appointed based on specified criteria; calling for applications from the public or nominations from the professional organisations related to the subject and the political appointments are done away with and those appointed should not be changed with a change of minister. The practice of Ministers handing over letters of appointment to public officers should cease, since it reinforces the idea that jobs are the prerogative of the Minister.

The unsustainable and highly politicized practice of treating SOEs as a means to solve unemployment problems through ‘sponsored employment’ should cease forthwith.

Schemes of Recruitment need to be strictly followed in making appointments, and administrators should be protected against interference by politicians. The Right to Information Act should be strengthened in this respect to make information as to all appointments and criteria followed publicly available.

Senior positions should be advertised, and the selection of Board of Directors should have strong external representation, and carefully screened through a Nominee Committee of the Constitutional Council or the Public Services Commission.

The proposals further suggest professional management, transparency and accountability, financial discipline, performance monitoring and progress review of key performance indicators (KPIs) measured with provision for incentives, effective internal controls, risk management practices, audit, and adequate disclosures in financial reporting, to be introduced among others at SOEs.

“The Chairpersons and Board of Directors should provide a one-page account each quarter to the Secretary / Minister as to what has been accomplished and what the priorities are for the next quarter. They should also have a clear statement of goals and report in terms of their work towards these goals. These too must be reviewed by the Coordinating Ministry.” He said.

If the above objectives are to be achieved, the media should play a pivotal role in educating the citizens and citizens cannot continue to be passive observers but must bring in the pressure upon the politicians to introduce the required governance practices to address the sorry state of affairs at SOEs.