Globally, successful nations have leveraged their State-Owned Enterprises (SOEs) to improve the economic wellbeing of its citizens. China for example has seen a tremendous growth in its SOEs, particularly since its economic boom era. India and Brazil are also examples of nations whose failing SOEs have turned around and now contribute to the wellbeing of its citizens as well as contribute to the overall economic success of the nation.
Surprisingly even Gulf monarchies have successfully leveraged their SOEs, which are well managed and highly profitable.
But, what happened in Sri Lanka?
The Committee on Public Accounts (CoPA) Report tabled in Parliament recently has startling revelations about State Owned Enterprises (SOE) that cost the country colossal sums of money. On June 18, addressing a media workshop, Speaker Karu Jayasuriya revealed that the loss from SOEs was over Rs.50 billion.
Speaker Jayasuriya addressing a forum on good governance recently, said, “There continues to be a lack in the professional management of state-owned-public enterprises. We have always maintained that the boards of directors and chairmen should be dynamic professionals, well-versed on the enterprise, industry and its market, and not friends and family members.”
The recent COPE Committee reported a number of serious concerns of SOEs, which require immediate action. The concerns include (1) lack of transparency and accountability, (2) lack of professional management of public enterprises, (3) financial indiscipline, irregularities, manipulations and malpractices, (4) ineffective progress review and performance monitoring, (5) ineffective internal controls, risk management practices and audit and inadequate disclosures in financial reporting.
These losses continue to have high negative impact on our fiscal costs. Over the years, most of these establishments have reported significant and persistent operating losses. Professional economists believe that bailing out these public enterprises by the Government will be a mammoth task.
What needs to be done
It maybe that SOEs are owned by the Government, in full or in part and many of them are providing essential public goods and services such as water, electricity, and transportation. But they must not forget they are commercial enterprises working with Balance Sheets and Profit and Loss Accounts. That means, while serving the people they must also generate reasonable profits.
In this writer’s opinion, if we are to revive the flagging SOEs, we need to confront four key challenges.
(1) We need to clarify clearly the roles and responsibilities of the Government regarding the SOEs. This goal requires a balance, between the Government’s active ownership responsibilities (such as appointing boards and providing control and oversight), and the need to maintain a “level-playing field” for market competition. It is not going to be a easy task unless two important conditions are met: (a) clear legal and regulatory framework, including corporate rules and codes, and (b) a strong and independent coordinating body for oversight and control.
(2) A team of qualified, experienced persons should be appointed to SOE boards.That means, all board appointments be based on merit and not any other criteria. This points to the need for a unified minimum standard for SOE boards. And, like in private corporate sector, Board members must be allowed to take independent decisions within the parameters of Government policies. Their performance must be judged the service quality and profit earned.
(3) An organisational culture of efficiency, integrity, competitiveness and innovation must be instilled in all SOEs. To do this, higher management should apply stringent internal controls and risk management systems. More broadly, this means ensuring, that in every aspect transparency, accountability, and ethics are respected.
(4) For SOEs to implement best practices specified in (1), (2) and (3), formal Government agreement should be available. Without that, all efforts to revive and maintain the reforms are likely to fail.
Role of the Boards
The globally accepted duty of any Board of Directors is to protect the assets of the shareholders and ensure that they receive a reasonable return on their investment.
The shareholders may be the Government as a body or individual citizens. Additional duties of the board include the appointment of CEO and often the executive management. They must be able to do those without any fear or favour.
Energising economy
Economists of the western world have in the recent past, have taken a shift away from liberal orthodoxy and acknowledged that SOEs have a role to play in developing economies. They agree that, if solidly positioned with the right personnel and structure, SOEs will enable long term growth in a developing country. The citizens of this country had great expectations when SOEs were established years ago, but, most of SOEs have fallen far short of those expectations. There is also growing concern that the failure of SOEs will lead to the further decline of the Sri Lankan Economy. The time is ripe for the Government to step in.
Maybe, we take a lesson from South African experience.
South African experience
In May 2010, the President of South Africa commissioned a Presidential State-Owned Enterprises Review Committee to recommend proposals to strengthen the role of State-owned enterprises. A key recommendation of the Committee had been that the government should enact a single over-arching law – the ‘State-Owned Entities Act’ – which would govern all SOEs, as South African legislation on SOES at that time was fragmented and was often conflicting.
They also recommended a SOE ‘Council of Ministers’ from the relevant ministries, Treasury and other relevant stakeholders, should be established to oversee implementation of the Act and to enable collaboration between SOEs and government departments at all levels. Sri Lanka faces the same situation. According to the Treasury reports, it is said that Sri Lanka has only 245 State Owned Enterprises (SOEs), yet there is no single document from which information on their size or performance can be extracted.The SOEs represent a major sector of Sri Lanka’s public sector institutions. Therefore. the Government’s urgent attention to this issue is of paramount importance.