“We have to adopt multiple approaches to get more efficient State-Owned Enterprises (SOEs),” says LIRNEasia Chairman Prof. Rohan Samarajiva; outlines ways in which SOE reforms could be carried out to enable Sri Lanka’s economic recovery.

By Marianne David

“We have to adopt multiple approaches to get more efficient State-Owned Enterprises (SOEs),” said LIRNEasia Chairman Prof. Rohan Samarajiva, in an interview with The Sunday Morning, outlining ways in which SOE reforms could be carried out to enable Sri Lanka’s recovery.

While welcoming the move to establish an SOE Restructuring Unit as proposed in the interim Budget, Prof. Samarajiva however noted that more needed to be done. He also asserted that everyone had a role to play in Sri Lanka’s recovery, pointing out that “we have to straighten out this country together”.

Following are excerpts of the interview:

Speaking at the #ReformNow conference recently, you said ‘the State has no capacity to privatise anything today’. Where do we go from here?

Apparently the President has also understood this fact and Rs. 200 million has been set aside to establish an SOE Restructuring Unit. That is a good start, but it is not enough. When you work within government, you have to first understand the constraints in setting up such a unit.

In 2003, when we were setting up the Information and Communication Technology Agency (ICTA), we figured that if we were going to have people who were capable of managing the best in the ICT sector, we had to pay them decent salaries. But from the day ICTA was created, there was an ongoing battle with the Administrative Service, which wanted salaries to be brought down and all these conventional government rules applied. That will repeat itself here as well.

Let’s assume we can get over that. Even then, this will require a significant mobilisation of external consultants. We have to understand that people may have knee-jerk reactions to this, but you have to spend significant amounts of money to get the right kind of experience. On the local side, you need people who are knowledgeable and self-confident, who can manage the consultants.

I think we have a good start. We need to quickly get over the problem of how this is to be structured, how we recruit the right kind of people, and how the technical assistance is to be funded.

How do you view the proposed reactivation of the Statements of Corporate Intent (SCI) process?

I have been somewhat critical of the SCI, because they have been very loosely worded and not properly implemented, but that is not to say that there is no role for them. We have to adopt multiple approaches to get more efficient SOEs.

We have to take a certain identified subset and sell them off; this is something governments have done. For example, the Hotels Corporation was completely privatised by a government headed by Mahinda Rajapaksa.

Secondly, there may be other organisations that have social objectives and not profit objectives only; there it may be useful to try a rigorous application of the SCI. We need to try different solutions, and if the solution is working, bring more organisations to that solution.

Sri Lanka has over 500 SOEs. Instead of appointing a centralised body to oversee all, you’ve recommended taking some and putting them under centralised ownership and seeing what works. Could you expand on this?

There are proposals to put all the companies under a centralised company, having looked at Malaysia’s Khazanah and Singapore’s Temasek. I am cautioning looking at the models being discussed with some care.

I have not studied the Malaysian model deeply, but I have spent some time looking at Temasek, which takes only SOEs that have purely commercial objectives, like Singapore Airlines and Singtel. Temasek also owns shares in foreign companies. It’s an investment company because it has a mandate to diversify its portfolio to make sure it gives a proper rebate to the Government.

That would be the criteria. You take the SOEs that are solely profit-oriented and deal with them in that manner.

You’ve repeatedly called for a complete sale of SriLankan Airlines, after carving out catering and ground services. Proposals were recently called only to invest in shares and engage in the administration of catering and ground handling. How do you view this?

I would say I am disappointed. Thilan Wijesinghe has done considerable work on dealing with SriLankan. What he said was that investors look at these three operations in different ways and when you mix them up, you get a set of muddled valuations; therefore they need to be separated. I agree.

The easiest business case is for the catering company. A good and modern catering company can actually provide food for multiple airlines. SriLankan Catering is a state-of-the-art operation, so if it wants to compete, it needs to treat all airlines fairly. You need a company that is 100% focused on getting that business and making money.

There are accounts of VIPs asking for catering for their almsgivings to be done by SriLankan Catering. How do you insulate the company from such requests? By removing Government control. It can be sold off 100% – there is no strategic interest in a catering business.

Ground handling is a little more complicated. It’s been a monopoly, giving monopoly profits to SriLankan. Singapore has its own ground handling company, but it has also permitted Dubai-based dnata to operate there, because it wants to give a degree of competition and choice to the airlines. We should think about opening up ground handling to competition.

I would advise that it should be done after looking at similar-sized airports and BIA’s long-term expansion plans to see whether we are putting in a system that is capable of handling the requirements 5-10 years from now.

In the case of SOEs with excessive losses like the Ceylon Electricity Board (CEB) and Ceylon Petroleum Corporation (CPC), you’ve advised a cost-reflective, formula-based tariff and restructuring, not necessarily privatisation. How would you recommend reforming these entities?

Let’s take the big one, which is the CEB. In the late ’90s there was a steering committee that had the participation of all stakeholders and they came up with a design for restructuring. It was not optimal, but it was workable. A law was enacted in 2002, but as soon as the government changed, that law was repealed at the request of the JVP and a new law was drafted, which nullified the ability to regulate the CEB.

Why do I say that? Because the original design disaggregated the company. The generating parts were in one unit; the high voltage transmission companies in another; and the distribution units in yet another. Each had its own CEO and the engineers got their perks. However, they were not financially separated, which was a critical weakness. When you don’t financially separate these units, there is no possibility of benchmarking or comparing their performance.

The other part is about how you restructure it in a way that can be regulated. We have a façade of regulation where the Public Utilities Commission of Sri Lanka (PUCSL) goes through the motions, but is incapable of disciplining the CEB. I believe that minimally, we have to have account separation.

While the regulator has the ability to fine the regulated entity and disallow certain costs, it can’t actually do that because the CEB is a State-owned entity. If the owner or at least the part-owner is private and costs are disallowed, they have an incentive to respond. That is the sort of minimal requirement we have to meet. It is also possible to easily enter into Public-Private Partnerships (PPPs) for the distribution business.

As you recently tweeted, the bar is low for SOEs – not causing losses to the Treasury. How long can we continue like this? Do you see any will to change?

We can’t continue like this. However, it’s not like there is some decision-maker somewhere with complete control and members of the public and informed individuals over here who have no control. We have to straighten out this country together.

I recently posted an article I had written in 2017, where I said things about SriLankan Airlines. One line was, ‘Why doesn’t the Government concentrate on running one airline into the ground instead of two?’ Back then I was a very lonely voice; there weren’t people supporting my thinking. Today I am in the majority. I have that kind of optimism. I think we will make these changes.

Take the data that Daniel Alphonsus presented at the #ReformNow conference. He looked at Sri Lanka Telecom (SLT) and Dialog – one privately-owned and the other State-owned – and showed that SLT’s return on assets is considerably lower. That means it is not managed properly. It was on the right track when it was under a management contract to the Japanese, but Thilanga Sumathipala campaigned hard not to renew the management contract so that he could exert control and see where it got us. We also had the then President’s brother as SLT Chairman and he made several wrong decisions as well.

What we need is ideally a private entity with majority ownership so that they can have the chairman on the board and assert themselves over unqualified people put in by governments.

There is no accountability relating to SOE losses and there is no transparency either. How can this be addressed?

My understanding is that the President is thinking about a parliamentary SOE committee. I think Dr. Harsha de Silva has said the Committee on Public Enterprises (COPE) can do it. No, COPE functions in a retrospective manner. You can have accountability there.

Our National Audit Office is seeking to go beyond conventional financial auditing and into performance auditing. Now, I have certain concerns about the quality and criteria of their performance auditing, but they are on the right track. There you can have some transparency and accountability.

If there is an oversight committee responsible for SOEs, there are pros and cons. For example, the committee on agriculture can take responsibility for SOEs in agriculture, the health committee can exercise responsibility for the State Pharmaceuticals Corporation (SPC), etc. Whether there is a need for a separate SOE committee is open for discussion.

Oversight committees are not post-mortems; they are about things that are happening, looking at legislation and policies and so on. I think we could use these mechanisms in Parliament to ensure accountability and transparency, but we have to get the right numbers and the right metrics. If making some profit or not making any loss is enough, then we will be using the wrong criteria. We need better criteria.

How should key appointments to SOEs be made?

The current practice is that each government appoints the boards and every time the minister is changed, the boards of corporations under the ministry are often changed. This can lead to enormous uncertainty and concern. I personally don’t see anything wrong with either the chairman or one person on the board being somewhat accountable to the minister, but all the appointments should not be based on that criteria.

When I was asked to come in to rescue ICTA back in 2018, I said I needed the right kind of board and I was asked to give the names, which I did. Except for one – the minister’s son – everybody else was highly-qualified and they were there because I wanted them to be there, not because they were political flunkies. You could say that’s not ideal, because it was my judgement as to who was good and who was bad. In our Common Minimum Programme, we say that a fit and proper test should be used for all of these board appointments. That is also a solution.

Now we can go beyond that. This holding company everyone is talking about – I am okay with a holding company managing 10-15 commercially-oriented companies – should have the ability to appoint all the directors and hold them accountable. Their performance criteria are really about profitability, efficiency, market share, etc., rather than some amorphous criteria that politicians come up with. If you can do those things, it would be ideal. These positions should never be rewards for assistance given at elections.

Courtesy:Sunday Morning