“A basic principle of modern State capitalism is that costs and risks are socialised to the extent possible, while profit is privatised.” –Noam Chomsky
It is not easy to avoid the word “privatisation” in media reports and discussions people see and hear regarding the country’s efforts of getting out of the economic slump Sri Lanka is in at the moment.
One doesn’t have to be a Nobel Prize winning economist like Stiglitz to realise that the country is where it is today due to mismanagement of institutions and irresponsible policy decisions mainly by incompetent and/or corrupt officials and politicians of several of its post-independent governments.
Soon after independence in 1948, the country adopted a ‘nationalisation policy’ to bring most of the public utility systems and industries that were using or could use country’s natural resources under Government control.
Public corporations
These efforts led to establishment of public corporations such as the Ceylon Tyre, Ceramics, Steel, Cement, Plywood, Leather Products, Oils and Fats, and Fisheries, Mineral Sands, National Salt, Textile, State Engineering, Timber, Hardware, Paranthan Chemicals, Eastern Paper Mills and the Sri Lanka Sugar Corporations.
Several years later Sri Lanka State Trading (General, Textile, Tractor) Corporations were established under a ‘Trading Corporation Act’. There were several other corporations such as Ceylon Broadcasting, Petroleum, State Printing, State Plantation Corporations and Ceylon Transport Board, Water Resources Board, and banks (People’s, Savings, Mortgage) that were established time to time by successive governments using ‘Special Statutes’.
Though younger citizens of the country have not had a chance to experience it, Sri Lanka was producing a whole lot of things within the country without depending on imports until the trend was reversed by the ‘Open Economy’ policy of the Government that came to power in 1977.
Encouraging foreign investments in export-oriented manufacturing the Greater Colombo Economic Commission (GCEC) was established and a Presidential Commission was appointed to advise the Government about the strategies on identifying public enterprises for privatisation.
The process started in 80s and gradually privatised establishments such as Textiles (Pugoda, Thulhiriya and Veyangoda), Dankotuwa Porcelain, Distilleries and Milk Board. Some were converted to Public-Private Partnerships.
Most common rationale for privatisation of State-Owned Enterprises (SOEs), given by policy makers and funding agencies such as the International Monetary Fund (IMF) are, cutting Government expenditure down and increasing the efficiency and the productivity of the industry.
SOEs are typically viewed as overextended and poor performers. Studies show that privatised entities were much more economically efficient than their State-owned past with higher labour productivity even with a smaller labour force.
World Bank studies show that SOEs in developing countries accounted for a substantial portion of the outstanding domestic debt and foreign borrowing. About 3000 public enterprises have been privatised in more than 60 developing countries in a 5 – 6-year span from the late 80s to early 90s.
Though privatisation has often been tried in developing countries, especially during financial crises, it is not a concept limited to such situations and/or countries. Developed economies have also opted to privatise certain State-run establishments including utilities using appropriate mechanisms addressing the rights of all the citizens to have access to their basic needs at an affordable price.
What most proponents of privatisation do not try to analyse is the root causes for the failure of SOEs and the success of the Privately-Owned Enterprises (POEs). Though the success or failure of POEs is mainly measured through their profits and losses, it may not be the only criteria to judge the performance of SOEs. Many of the SOEs are established for the purpose of providing public goods and services and not necessarily within a profit maximisation framework.
One of the reasons for less than satisfactory efficiency and productivity levels in SOEs is the high operational cost due to overstaffing the organisation with unqualified or under qualified incompetent people.
Supporters
Some of the SOEs in Sri Lanka, as well as in many other developing countries, are used as POEs of the politicians in charge of the relevant line ministries to accommodate his/her supporters requests for employment. The very first action of the politician is to appoint a Chairperson/CEO/Director/Vice-Chancellor and a Board of Directors from the pool of his relatives/friends/supporters to make sure that they will follow his orders/requests without questioning their negative effects, if any, on the establishment.
They then strengthened their loyalty to the politician by filling the vacancies, in some cases even by creating vacancies, using the lists provided by the politician. Such recruits are chosen to perform the desired tasks based on the fancies of the political establishment rather than based on the desired outcomes of the establishment or the needs of the country at the time.
The other side of this very interesting coin is POEs functioning as SOEs. Private sector of developing countries cannot be compared with that of developed countries since the market conditions are worlds-apart, both literally and figuratively. Studies done by funding agencies such as IMF, World Bank, and Asian Development Bank (ADB) have documented both these phenomena, SOEs functioning as POEs of politicians and POEs functioning as SOEs where the profits such POEs make are mainly due to government contracts they receive through their political connections.
More often than not, such contracts are awarded to the companies run by relatives or friends of the politician or to the ones either willing to pay the commission the politician is asking for or have made sizable contributions to the political campaign.
These private companies then optimise their profits by getting as much public money as possible from the treasury and delivering an end-product at the lowest quality with the lowest cost. In the process of cutting the labour costs such POEs also resort to hiring unqualified/under qualified incompetent people at lower salaries. For all practical purposes such POEs function very much like the typical SOEs in these countries. Under these circumstances, if one wonders whether privatisation is good or bad, the most likely conclusion would be: ‘It depends’. It, first and foremost, depends on the integrity and intentions of the people who are involved with the process, then what they mean by privatisation (selling SOEs to private parties, establishing Public-Private Partnerships, Outsourcing specific functions of SOEs to private sector and so on), how they plan to implement it, and what the expected outcomes are.
Process
If one has experienced SOEs functioning as POEs or vice-versa and the same or similar people are involved in the process of privatisation, then one will not have any difficulty in gauging the integrity of them.
The most important factors are the intentions. If the politicians are trying to sell the public properties/establishments to the one who gives them the biggest commission, or the private owners are expecting Government support to run monopolies in respective disciplines then the citizens will not see much of a change in country’s economy at all.
Unfortunately for the average citizen of the country (fortunately perhaps for the people who intend to make personal gains through the process of privatisation) the funding agencies such as IMF/World Bank/ADB cannot formulate human qualities such as ‘integrity’ and ‘intentions’ when they expect the borrowers to implement privatisation to be worthy of their conditional generosity.
The writer has served in the higher education sector as an academic over twenty years in the USA and fifteen years in Sri Lanka and he can be contacted at [email protected] )