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WHY GOVERNMENT SHOULD SELL EVEN PROFIT-MAKING STATE-OWNED ENTERPRISES
By Sanjeewa Jayaweera
The recent pronouncement by President Ranil Wickremesinghe (RW), that “The government has no business to be in business.” was music to the ears of those who believe in a free market economy. However, it also drew the ire of the loony left, the trade unions, a few die-hard academics who still cling to ideals of socialism as well as a few journalists.
In all probability, if a straw poll is conducted, most voters would say that the Government of Sri Lanka (GOSL) should continue to own and operate state-owned enterprises (SOEs). It is indeed a paradox that despite it being well-known that SOEs are inefficient, corrupt and a drain on taxpayer funds due to significant losses, many in our country still believe privatization is undesirable. One can only assume this is due to the entitlement mentality ingrained in us over several decades and the belief that the government should be our provider.
What ails the SOEs
Citizens ultimately own SOEs but have no voice and lack the interest or wherewithal to monitor them. Therefore, efficiency is entirely dependent on the existing system of governance. Political patronage is the criterion for selecting the top management of SOEs allowing government politicians to choose their relatives and close friends despite their having no prior experience in holding such positions. That such appointments have resulted in adverse consequences to the enterprise and the country is a well known fact.
Employment in state institutions has been on a ‘Jobs for the Boys’ philosophy to which many, including university graduates, subscribe. All SOEs are overstaffed primarily due to elected politicians using their power and influence to overload them despite no existing vacancies. The problem has been compounded by the fact that most of those appointed are poorly skilled. Once employed, they join trade unions and demand above-average wages and bonuses even when losses are being incurred. They want their personal income tax paid by the SOE and light work norms. So it is not surprising that despite the economic Armageddon we have hit, many still hang on to the belief that the government should be running businesses.
The need to educate the public
The recent announcement by the government that it intends to divest its investments in Sri Lanka Telecom (SLT), Lanka Hospitals (LH), and the Sri Lanka Insurance Corporation (SLIC) has resulted in many, including the leader of the opposition, the JVP, trade unions, a few journalists and other media personnel together with some academics to say “We are against the privatization of profit-making SOEs.” Their opposition to the sale resonates with the public and supports the theory of selling the family silver.
When a young journalist posed this question to RW at a media conference, he told her in his typically offhand and condescending tone, “We have debts to settle as well.” I believe it was an opportunity lost by RW to explain through the media to the people why it makes perfect sense to dispose of the shares held in SLT, SLIC and LH.
In my opinion, when it comes to the economy and finance, most people in our country are ignorant. Many highly educated people and experts in their own field I know say, “I don’t know or understand finance.” In the last couple of years, we have seen greater discussion and information sharing on the economy and finance due to the economic crisis. However, there is still a lack of understanding and proper appreciation of the issues. The government must disseminate the policy through its media with greater focus and transparency. I have often been dismayed when RW and other government officials say, “The IMF has told us to do this and that”. Instead of passing the buck to the IMF, GOSL needs to say commonsense and financial prudence demands what we’re doing.
Why it’s sensible for GOSL
to sell its SLT stake
For me, the logic in selling the shares of profitable enterprises is evident on both financial and ideological grounds. In the case of SLT, the GOSL, through the Treasury and the Employees Trust Fund (ETF), currently own a controlling 50.9% of the company. A share of SLT trades presently at around Rs. 94 on the Colombo Stock Exchange. This means the company’s value is around Rs. 168 billion. Therefore the GOSL stake is worth around Rs. 86 billion.
However, the current market price of an SLT share is significantly overvalued due to the anticipated sale of the government stake. According to the company’s latest Annual Report, in the last 10 years up to the end of 2021, the highest price the share commanded was Rs. 57.30 in 2014. However, in 2022 the highest traded price was Rs. 78.90, whilst the lowest was Rs. 28.70. Obviously, an independent valuation would need to be carried out considering that a controlling stake is being sold. Several well-established methodologies are used in the valuation of companies.
To illustrate my point that it is beneficial for GOSL to sell out, I will assume Rs. 65 per share is the price the government will get on the deal. The GOSL would therefore be able to receive Rs. 59.7 billion by selling its SLT stake.
I have set out below the last five-year financial performance, capital expenditure and dividends paid to GOSL by the SLT Group.As can be observed, despite posting healthy profits, the dividends declared have been constrained by the high capital expenditure incurred. Given the rapid technological development and the ever-expanding use of mobile communication and the Internet, all telecommunication companies need to incur continuous capital expenditure to keep abreast.
The table shows the GOSL has only received total dividends of Rs 5.4 billion over five years, an annual average of Rs 1.1 billion a year.
So the question is whether retaining its SLT shares and earning Rs. 1 billion a year against receiving Rs. 59.7 billion as sales proceeds, is beneficial to the country or not. As stated by RW , the GOSL by selling could then utilize the Rs. 59.7 billion proceeds to retire some of its current debt and also not raise new loans as is currently done at interest rates above 20% plus. The interest saving for a year on the new debt at 20% would be Rs. 12 billion.
Opportunity cost is the criterion for making prudent financial decisions. The definition of opportunity costs is the value or benefit of what you lose or miss when you choose one alternative over another. In this instance, in case the GOSL does not sell its SLT stake at my assumed price of Rs. 65 per share, the opportunity cost foregone is Rs. 11 billion for a year.
The sale of SLT shares will not impact on our national security as the largest telecommunications operator in the country is a foreign-owned entity.
In 1997, the government, through a competitive bidding process, sold 35% of its shareholding in SLT to Nippon Telegraph and Telephone (NTT) of Japan for US$ 225 million. This was then the largest ever privatization transaction of GOSL.
The transformation of SLT under a Japanese CEO after partial privatization was immense and is often cited as an example of why SOEs should be privatized. The days when we had to wait nearly five years to get a new fixed-line connection were ended as SLT was transformed into a service-centric business enterprise. However, even after two decades, the Chairman of SLT, in his message to the shareholders in the 2021 Annual Report, laments, “In January 2020, we saw a company with immense potential, but its progress was obstructed in several areas. Staff unrest was at the top of the list with regular strikes and work stoppages leading to poor messaging (signalling) to the customers, especially the corporate sector.”
Staff remuneration cost at SLT versus its competitor
According to the latest Annual Report (AR), SLT employed 8,058 staff. In 2021 costing Rs. 20.7bn. wages. In contrast, Dialog Axiata Plc, its main competitor, with a significant market share (17.7 mn subscribers vs SLT’s 9.3 million) and revenue (Rs 142 Bn vs Rs. 102Bn) over SLT, employed only 3,631 staff with a total wage bill of Rs. 10 bn. The bottom line is that SLT incurs Rs. 10.7 bn staff costs over its competitor to service a subscriber base significantly lower than its rival. These figures reflect the cost inefficiencies at SLT and other SOEs and is the primary reason the trade unions vehemently oppose the sale of the GOSL stake.
Furthermore, Dialog Axiata Plc has stated in its Annual Report that they have invested US $ 3 Bn since inception. In 2021, they paid Rs 8.4 billion as direct taxes and collected Rs. 14.8 Billion as consumption taxes. Another benefit of privatization for the GOSL is that it stands to collect higher direct taxes from companies operating efficiently with a cost focus.
The logic I have applied to the sale of the SLT stake is equally applicable to the sale of the GOSL stakes in Lanka Hospitals and Sri Lanka Insurance Corporation.
We need to set aside, at least now, this long-held view that the government should be involved in controlling and operating businesses. The process of privatization is lengthy and, as can be seen, will meet various hurdles. However, the GOSL must be steadfast in its determination to go ahead with the planned privatization/restructuring process of SOEs and actively engage the public and educate them of the benefits.
Transparency and competitive bidding when Privatising SOEs
A mandatory requirement for privatization is that the process must be totally transparent and be based on competitive bidding. Furthermore, the base price/valuation for sale should be arrived at by an independent party so that they are no doubts that the GOSL and the people received the best possible deal.
The success of India
Sri Lanka should look across the ocean at India, which since 1991 has been following a strategy of Liberalization, Privatization and Globalization that has led to consistent economic growth; India is now considered a global economic powerhouse. A few years back, Prime Minister Narendra Modi said the government has no business to be in business, and his administration is committed to privatizing all PSUs barring the bare minimum, in four strategic sectors.
“It is the government’s duty to support enterprises and businesses. But it is not essential that it should own and run enterprises,” he said. Modi also said the Centre’s policy is to either monetize or modernize public sector enterprises on the basis that the government has “no business to be in business”.
(The views and opinions expressed in this article are of the author and are not of any institution or organization that he may be associated with.)
by Dr Gotabhya Ranasinghe
Senior Consultant Cardiologist
National Hospital Sri Lanka
When we sought a meeting with Hon Dr. Ramesh Pathirana, Minister of Health, he graciously cleared his busy schedule to accommodate us. Renowned for his attentive listening and deep understanding, Minister Pathirana is dedicated to advancing the health sector. His openness and transparency exemplify the qualities of an exemplary politician and minister.
Dr. Palitha Mahipala, the current Health Secretary, demonstrates both commendable enthusiasm and unwavering support. This combination of attributes makes him a highly compatible colleague for the esteemed Minister of Health.
Our discussion centered on a project that has been in the works for the past 30 years, one that no other minister had managed to advance.
Minister Pathirana, however, recognized the project’s significance and its potential to revolutionize care for heart patients.
The project involves the construction of a state-of-the-art facility at the premises of the National Hospital Colombo. The project’s location within the premises of the National Hospital underscores its importance and relevance to the healthcare infrastructure of the nation.
This facility will include a cardiology building and a tertiary care center, equipped with the latest technology to handle and treat all types of heart-related conditions and surgeries.
Securing funding was a major milestone for this initiative. Minister Pathirana successfully obtained approval for a $40 billion loan from the Asian Development Bank. With the funding in place, the foundation stone is scheduled to be laid in September this year, and construction will begin in January 2025.
This project guarantees a consistent and uninterrupted supply of stents and related medications for heart patients. As a result, patients will have timely access to essential medical supplies during their treatment and recovery. By securing these critical resources, the project aims to enhance patient outcomes, minimize treatment delays, and maintain the highest standards of cardiac care.
Upon its fruition, this monumental building will serve as a beacon of hope and healing, symbolizing the unwavering dedication to improving patient outcomes and fostering a healthier society.We anticipate a future marked by significant progress and positive outcomes in Sri Lanka’s cardiovascular treatment landscape within the foreseeable timeframe.
by Fr. Emmanuel Fernando, OMI
Jesuit Fr. Aloysius Pieris (affectionately called Fr. Aloy) celebrated his 90th birthday on April 9, 2024 and I, as the editor of our Oblate Journal, THE MISSIONARY OBLATE had gone to press by that time. Immediately I decided to publish an article, appreciating the untiring selfless services he continues to offer for inter-Faith dialogue, the renewal of the Catholic Church, his concern for the poor and the suffering Sri Lankan masses and to me, the present writer.
It was in 1988, when I was appointed Director of the Oblate Scholastics at Ampitiya by the then Oblate Provincial Fr. Anselm Silva, that I came to know Fr. Aloy more closely. Knowing well his expertise in matters spiritual, theological, Indological and pastoral, and with the collaborative spirit of my companion-formators, our Oblate Scholastics were sent to Tulana, the Research and Encounter Centre, Kelaniya, of which he is the Founder-Director, for ‘exposure-programmes’ on matters spiritual, biblical, theological and pastoral. Some of these dimensions according to my view and that of my companion-formators, were not available at the National Seminary, Ampitiya.
Ever since that time, our Oblate formators/ accompaniers at the Oblate Scholasticate, Ampitiya , have continued to send our Oblate Scholastics to Tulana Centre for deepening their insights and convictions regarding matters needed to serve the people in today’s context. Fr. Aloy also had tried very enthusiastically with the Oblate team headed by Frs. Oswald Firth and Clement Waidyasekara to begin a Theologate, directed by the Religious Congregations in Sri Lanka, for the contextual formation/ accompaniment of their members. It should very well be a desired goal of the Leaders / Provincials of the Religious Congregations.
Besides being a formator/accompanier at the Oblate Scholasticate, I was entrusted also with the task of editing and publishing our Oblate journal, ‘The Missionary Oblate’. To maintain the quality of the journal I continue to depend on Fr. Aloy for his thought-provoking and stimulating articles on Biblical Spirituality, Biblical Theology and Ecclesiology. I am very grateful to him for his generous assistance. Of late, his writings on renewal of the Church, initiated by Pope St. John XX111 and continued by Pope Francis through the Synodal path, published in our Oblate journal, enable our readers to focus their attention also on the needed renewal in the Catholic Church in Sri Lanka. Fr. Aloy appreciated very much the Synodal path adopted by the Jesuit Pope Francis for the renewal of the Church, rooted very much on prayerful discernment. In my Religious and presbyteral life, Fr.Aloy continues to be my spiritual animator / guide and ongoing formator / acccompanier.
Fr. Aloysius Pieris, BA Hons (Lond), LPh (SHC, India), STL (PFT, Naples), PhD (SLU/VC), ThD (Tilburg), D.Ltt (KU), has been one of the eminent Asian theologians well recognized internationally and one who has lectured and held visiting chairs in many universities both in the West and in the East. Many members of Religious Congregations from Asian countries have benefited from his lectures and guidance in the East Asian Pastoral Institute (EAPI) in Manila, Philippines. He had been a Theologian consulted by the Federation of Asian Bishops’ Conferences for many years. During his professorship at the Gregorian University in Rome, he was called to be a member of a special group of advisers on other religions consulted by Pope Paul VI.
Fr. Aloy is the author of more than 30 books and well over 500 Research Papers. Some of his books and articles have been translated and published in several countries. Among those books, one can find the following: 1) The Genesis of an Asian Theology of Liberation (An Autobiographical Excursus on the Art of Theologising in Asia, 2) An Asian Theology of Liberation, 3) Providential Timeliness of Vatican 11 (a long-overdue halt to a scandalous millennium, 4) Give Vatican 11 a chance, 5) Leadership in the Church, 6) Relishing our faith in working for justice (Themes for study and discussion), 7) A Message meant mainly, not exclusively for Jesuits (Background information necessary for helping Francis renew the Church), 8) Lent in Lanka (Reflections and Resolutions, 9) Love meets wisdom (A Christian Experience of Buddhism, 10) Fire and Water 11) God’s Reign for God’s poor, 12) Our Unhiddden Agenda (How we Jesuits work, pray and form our men). He is also the Editor of two journals, Vagdevi, Journal of Religious Reflection and Dialogue, New Series.
Fr. Aloy has a BA in Pali and Sanskrit from the University of London and a Ph.D in Buddhist Philosophy from the University of Sri Lankan, Vidyodaya Campus. On Nov. 23, 2019, he was awarded the prestigious honorary Doctorate of Literature (D.Litt) by the Chancellor of the University of Kelaniya, the Most Venerable Welamitiyawe Dharmakirthi Sri Kusala Dhamma Thera.
Fr. Aloy continues to be a promoter of Gospel values and virtues. Justice as a constitutive dimension of love and social concern for the downtrodden masses are very much noted in his life and work. He had very much appreciated the commitment of the late Fr. Joseph (Joe) Fernando, the National Director of the Social and Economic Centre (SEDEC) for the poor.
In Sri Lanka, a few religious Congregations – the Good Shepherd Sisters, the Christian Brothers, the Marist Brothers and the Oblates – have invited him to animate their members especially during their Provincial Congresses, Chapters and International Conferences. The mainline Christian Churches also have sought his advice and followed his seminars. I, for one, regret very much, that the Sri Lankan authorities of the Catholic Church –today’s Hierarchy—- have not sought Fr.
Aloy’s expertise for the renewal of the Catholic Church in Sri Lanka and thus have not benefited from the immense store of wisdom and insight that he can offer to our local Church while the Sri Lankan bishops who governed the Catholic church in the immediate aftermath of the Second Vatican Council (Edmund Fernando OMI, Anthony de Saram, Leo Nanayakkara OSB, Frank Marcus Fernando, Paul Perera,) visited him and consulted him on many matters. Among the Tamil Bishops, Bishop Rayappu Joseph was keeping close contact with him and Bishop J. Deogupillai hosted him and his team visiting him after the horrible Black July massacre of Tamils.
Sri Lanka-Singapore Free Trade Agreement
By Gomi Senadhira
senadhiragomi@gmail.com
“You might tell fairy tales, but the progress of a country cannot be achieved through such narratives. A country cannot be developed by making false promises. The country moved backward because of the electoral promises made by political parties throughout time. We have witnessed that the ultimate result of this is the country becoming bankrupt. Unfortunately, many segments of the population have not come to realize this yet.” – President Ranil Wickremesinghe, 2024 Budget speech
Any Sri Lankan would agree with the above words of President Wickremesinghe on the false promises our politicians and officials make and the fairy tales they narrate which bankrupted this country. So, to understand this, let’s look at one such fairy tale with lots of false promises; Ranil Wickremesinghe’s greatest achievement in the area of international trade and investment promotion during the Yahapalana period, Sri Lanka-Singapore Free Trade Agreement (SLSFTA).
It is appropriate and timely to do it now as Finance Minister Wickremesinghe has just presented to parliament a bill on the National Policy on Economic Transformation which includes the establishment of an Office for International Trade and the Sri Lanka Institute of Economics and International Trade.
Was SLSFTA a “Cleverly negotiated Free Trade Agreement” as stated by the (former) Minister of Development Strategies and International Trade Malik Samarawickrama during the Parliamentary Debate on the SLSFTA in July 2018, or a colossal blunder covered up with lies, false promises, and fairy tales? After SLSFTA was signed there were a number of fairy tales published on this agreement by the Ministry of Development Strategies and International, Institute of Policy Studies, and others.
However, for this article, I would like to limit my comments to the speech by Minister Samarawickrama during the Parliamentary Debate, and the two most important areas in the agreement which were covered up with lies, fairy tales, and false promises, namely: revenue loss for Sri Lanka and Investment from Singapore. On the other important area, “Waste products dumping” I do not want to comment here as I have written extensively on the issue.
1. The revenue loss
During the Parliamentary Debate in July 2018, Minister Samarawickrama stated “…. let me reiterate that this FTA with Singapore has been very cleverly negotiated by us…. The liberalisation programme under this FTA has been carefully designed to have the least impact on domestic industry and revenue collection. We have included all revenue sensitive items in the negative list of items which will not be subject to removal of tariff. Therefore, 97.8% revenue from Customs duty is protected. Our tariff liberalisation will take place over a period of 12-15 years! In fact, the revenue earned through tariffs on goods imported from Singapore last year was Rs. 35 billion.
The revenue loss for over the next 15 years due to the FTA is only Rs. 733 million– which when annualised, on average, is just Rs. 51 million. That is just 0.14% per year! So anyone who claims the Singapore FTA causes revenue loss to the Government cannot do basic arithmetic! Mr. Speaker, in conclusion, I call on my fellow members of this House – don’t mislead the public with baseless criticism that is not grounded in facts. Don’t look at petty politics and use these issues for your own political survival.”
I was surprised to read the minister’s speech because an article published in January 2018 in “The Straits Times“, based on information released by the Singaporean Negotiators stated, “…. With the FTA, tariff savings for Singapore exports are estimated to hit $10 million annually“.
As the annual tariff savings (that is the revenue loss for Sri Lanka) calculated by the Singaporean Negotiators, Singaporean $ 10 million (Sri Lankan rupees 1,200 million in 2018) was way above the rupees’ 733 million revenue loss for 15 years estimated by the Sri Lankan negotiators, it was clear to any observer that one of the parties to the agreement had not done the basic arithmetic!
Six years later, according to a report published by “The Morning” newspaper, speaking at the Committee on Public Finance (COPF) on 7th May 2024, Mr Samarawickrama’s chief trade negotiator K.J. Weerasinghehad had admitted “…. that forecasted revenue loss for the Government of Sri Lanka through the Singapore FTA is Rs. 450 million in 2023 and Rs. 1.3 billion in 2024.”
If these numbers are correct, as tariff liberalisation under the SLSFTA has just started, we will pass Rs 2 billion very soon. Then, the question is how Sri Lanka’s trade negotiators made such a colossal blunder. Didn’t they do their basic arithmetic? If they didn’t know how to do basic arithmetic they should have at least done their basic readings. For example, the headline of the article published in The Straits Times in January 2018 was “Singapore, Sri Lanka sign FTA, annual savings of $10m expected”.
Anyway, as Sri Lanka’s chief negotiator reiterated at the COPF meeting that “…. since 99% of the tariffs in Singapore have zero rates of duty, Sri Lanka has agreed on 80% tariff liberalisation over a period of 15 years while expecting Singapore investments to address the imbalance in trade,” let’s turn towards investment.
Investment from Singapore
In July 2018, speaking during the Parliamentary Debate on the FTA this is what Minister Malik Samarawickrama stated on investment from Singapore, “Already, thanks to this FTA, in just the past two-and-a-half months since the agreement came into effect we have received a proposal from Singapore for investment amounting to $ 14.8 billion in an oil refinery for export of petroleum products. In addition, we have proposals for a steel manufacturing plant for exports ($ 1 billion investment), flour milling plant ($ 50 million), sugar refinery ($ 200 million). This adds up to more than $ 16.05 billion in the pipeline on these projects alone.
And all of these projects will create thousands of more jobs for our people. In principle approval has already been granted by the BOI and the investors are awaiting the release of land the environmental approvals to commence the project.
I request the Opposition and those with vested interests to change their narrow-minded thinking and join us to develop our country. We must always look at what is best for the whole community, not just the few who may oppose. We owe it to our people to courageously take decisions that will change their lives for the better.”
According to the media report I quoted earlier, speaking at the Committee on Public Finance (COPF) Chief Negotiator Weerasinghe has admitted that Sri Lanka was not happy with overall Singapore investments that have come in the past few years in return for the trade liberalisation under the Singapore-Sri Lanka Free Trade Agreement. He has added that between 2021 and 2023 the total investment from Singapore had been around $162 million!
What happened to those projects worth $16 billion negotiated, thanks to the SLSFTA, in just the two-and-a-half months after the agreement came into effect and approved by the BOI? I do not know about the steel manufacturing plant for exports ($ 1 billion investment), flour milling plant ($ 50 million) and sugar refinery ($ 200 million).
However, story of the multibillion-dollar investment in the Petroleum Refinery unfolded in a manner that would qualify it as the best fairy tale with false promises presented by our politicians and the officials, prior to 2019 elections.
Though many Sri Lankans got to know, through the media which repeatedly highlighted a plethora of issues surrounding the project and the questionable credentials of the Singaporean investor, the construction work on the Mirrijiwela Oil Refinery along with the cement factory began on the24th of March 2019 with a bang and Minister Ranil Wickremesinghe and his ministers along with the foreign and local dignitaries laid the foundation stones.
That was few months before the 2019 Presidential elections. Inaugurating the construction work Prime Minister Ranil Wickremesinghe said the projects will create thousands of job opportunities in the area and surrounding districts.
The oil refinery, which was to be built over 200 acres of land, with the capacity to refine 200,000 barrels of crude oil per day, was to generate US$7 billion of exports and create 1,500 direct and 3,000 indirect jobs. The construction of the refinery was to be completed in 44 months. Four years later, in August 2023 the Cabinet of Ministers approved the proposal presented by President Ranil Wickremesinghe to cancel the agreement with the investors of the refinery as the project has not been implemented! Can they explain to the country how much money was wasted to produce that fairy tale?
It is obvious that the President, ministers, and officials had made huge blunders and had deliberately misled the public and the parliament on the revenue loss and potential investment from SLSFTA with fairy tales and false promises.
As the president himself said, a country cannot be developed by making false promises or with fairy tales and these false promises and fairy tales had bankrupted the country. “Unfortunately, many segments of the population have not come to realize this yet”.
(The writer, a specialist and an activist on trade and development issues . )
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