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Friday December 8th, 2023

Loss vs profit debate major fallacy in Sri Lanka SOE restructure talk: reforms chief

Hoarding fuel amid shortages – File photo

ECONOMYNEXT – The discourse around restructuring Sri Lanka’s state-owned enterprises (SOEs) is unhelpfully focused on a misplaced dichotomy between loss-making and profit-making entities, according to the head of a government-appointed SOE restructuring unit.

Suresh Shah, head of the Finance Ministry’s SOE Restructuring Unit, speaking at a webinar on Wednesday June 14 said that the loss-making versus profit-making debate is a “major fallacy”. The webinar was organised by the Central Bank of Sri Lanka (CBSL)’s Centre for Banking Studies.

According to Shah, any enterprise, whether public or private, tends to return only dividends to the shareholder(s) while the profits proper generally go back into the company. In the case of a profitable SOE fully owned by the state, government revenue from the enterprise would comprise only dividends and, in terms of cash flow, those dividends would account for a very small component of total government revenue.

For example, he said, if an SOE made 1 billion rupees in profit in a given year and declared a dividend of 100 million rupees, only that 100 million would contribute to government revenue while the balance 900 would remain with the company.

“If you look at the last 10 years’ average of the dividends declared by all SOEs to the government, as a component of government revenue, it works out to about 0.5 percent,” said Shah, adding that this includes dividends declared by the state banks.

The SOE Restructuring Unit headed by Shah was appointed to oversee the divestment of state-held shares of the following SOEs:

  • Sri Lankan Airlines Ltd including Sri Lankan Catering Ltd
  • Sri Lanka Telecom PLC
  • Sri Lanka Insurance Corporation Ltd
  • Canwill Holdings Pvt. Ltd., (Grand Hyatt Hotel)
  • Hotel Developers Lanka Ltd., (Hilton Hotel Colombo),
  • Litro Gas Lanka Ltd., including Litro Gas Terminals (Pvt) Ltd., (LPG retailing)
  • Lanka Hospital Corporation PLC

Various critics including Sri Lanka’s main opposition party the Samagi Jana Balawegaya (SJB) have spoken against the privatisation of profit-making SOEs.


Sri Lanka opposition demands more transparency in SOE restructuring

According to Shah, however, this is a moot point.

By privatising SOEs, profitable or otherwise, he said, the government could earn greater revenue through taxation in addition to the revenue generated through the initial sale.

The ultimate objective of restructuring SOEs, the official, is to improve products and services delivered to consumers in a competitive economic framework ensuring fair pricing, increased quality and more availability.

“This is what restructuring is all about,” he said.

The profit vs loss-making debaprte aside, the state will still have to make a call on which enterprises should be privatised and which should be retained. According to Shah, this decision depends on whether or not there is a market failure. One reason a market failure could occur would be the emergence of a monopoly or a handful of players controlling the market leading to consumers not repeating the benefits of fair competition.

“You try to address this through the SOE system if and only if other mechanisms are not possible,” said the official, explaining that one such mechanism is regulation, through which the government can intervene to ensure fair pricing, product availability, etc.

Ideally, the government must only concern itself with the provision of essential goods and services. From a sales perspective, he said, there is a case for some state involvement, though, again, not necessarily through an SOE, to ensure an adequate supply of an essential good or service such as fuel. The government can take a call on whether it should step in to ensure supply or leave it in the hands of the private sector.

“The fundamental decision pointing to the government getting involved rests on this market failure,” he said.

Regulation is the mechanism through which the government can ensure there are enough private players in a competitive environment to ensure price, quality and availability, and this alone should be the deciding factor in whether or not a business should be unchained from the government, said Shah.

He reiterated that the fallacy of profit vs loss-making entities with regard to privatisation is unhelpful.

“Today’s loss making enterprise can be tomorrow’s profit making enterprise,” he said.

He stressed once again that revenue even from a profitable SOE would be minimal.

“If you take any entity, if you were to divest those listed entities today at the market price without a premium on the majority holding and you invested that proceeds of that in a fixed deposit, the deposit interest you will earn out of those proceeds is about four to five times the dividends the enterprise will declare in any given year,” said Shah.

“In purely cash flow terms, it makes sense to divest these entities,” he added, noting that 15 percent in value added tax (VAT), 2.5 percent as social security levy and 30 percent of the profit as income tax will all add to the total revenue generated.

The tax revenue alone would more than compensate for any dividend the “unchaining” of a profitable SOE the state would lose, said Shah.

“In purely cash flow terms, this story about profit vs loss making enterprise simply does not hold water,” he added.

Shah also warned that there is a danger in overly focusing on the government turning a profit, as the state’s responsibility to the public is to provide essential services such as health and education, areas in which the government should not be motivated by profit.

“They have public interest obligations they need to focus on,” he said, noting that the government has a monopoly on collecting tax revenue which it can use to fund its obligations.

“Profits should be the purview of the private sector not of the government,” he said.

“This is why we need to consider putting SOEs into private hands,” he added.

However, Shah acknowledged that some SOEs will have to remain with the state, especially where market failures might occur.

“We need to create a proper system to manage those enterprises. This is part of restructuring,” he said, adding that this is arguably more important than the discussion on privatisation.

The official also identified several reasons for the failure of SOEs over the past few decades. These include parking government subsidies within the SOEs rather than adding them to the government’s own balance sheet. The Ceylon Electricity Board (CEB) and the Ceylon Petroleum Corporation (CPC) maintaining poor balance sheets as a result of this eventually led to an energy crisis in the country, he noted.

Among other reasons Shah highlighted for SOE failures were poor management, political appointments and overstaffing and government systems and controls preventing efficiency.

Decision-making at an SOE would necessarily involve an arduous process and chain of command going all the way up to the cabinet of ministers, which would often take months. The cabinet may also not comprise the expertise such decisions demand. In the hands of a private player, on the other hand, the approach to such decision-making would be more efficient and take significantly less time.

The SOEs whose divestment is being contemplated have stakeholders that total 22 million people, and therefore transparency in the restructuring process is crucial, said Shah.

Transaction advisors have been sought via advertisements published locally and internationally and expressions of interest (EOI and requests for proposal (RFP) have been obtained, he said, adding that the restructuring unit is now in the midst of shortlisting advisors for the entities that have been identified for privatisation.

These advisors, once appointed, will help the unit with due diligence on the sales side and with valuation and the creation of investor data rooms, he added.

“We will then open up through EOIs and RFPs to invite bids from anyone making a proposal for any of the SOEs,” he said.

The cabinet will then make an award upon proper evaluation, and the entier process will be “very transparent,” said Shah.

“At the end of the day, all of us in the unit believe we have a responsibility to all citizens of this country,” he said. (Colombo/Jun14/2023)

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SLPP enjoying “great demand” from potential presidential candidates: Namal

FILE PHOTO – President Gotabaya Rajapaksa with nephew Namal at the opening of the last part of the Southern Expressway/PMD

ECONOMYNEXT – The ruling Sri Lanka Podujana Peramuna (SLPP) enjoys “great demand” from potential presidential candidates, and the party will have to take a call on working with incumbent President Ranil Wickremesinghe, MP Namal Rajapaksa said.

Speaking to reporters on Thursday December 07, Rajapaksa claimed several names have come up concerning the SLPP’s candidate at next year’s presidential election.

“There is great demand: entrepreneurs, businessmen, politicians, are all there. There are presidents too, ready to come forward with our party,” he said.

“Out of all these people, we will put forward on behalf of our party the candidate that can take the country forward while stabilising the economy,” he added.

Commenting on continued support for President Wickremesinghe, Rajapaksa said the while SLPP at present works with the former in the present government, the party will have to decide whether that relationship continues going forward.

“The matter of whether we work with the United National Party (UNP) in the future – this is not a politics dependent on individuals; the SLPP is a party. We will talk as a party with other parties, but no discussions will be held centred around individuals,” he said.

Rajapaksa noted that Wickremesinghe was the only member of parliament representing the UNP at the time of his election by parliament following the resignation of his predecessor Gotabaya Rajapaksa .

“If we are to collaborate with the UNP in the future, we’ll have to discuss that. Once the party has decided on that, we can get a start on those discussions. Today, we work with the president in the present government,” he said.

Last month, when asked to comment on President Wickremesinghe’s 2024 budget, MP Rajapkasa sounded rather sceptical of the president’s ambitions for turning the crisis-hit economy around.

“We must study the budget. He had presented a lot of these proposals in last year’s budget too. They don’t seem to have been implemented,” Namal Rajapaksa said, speaking to reporters after the budget presentation Monday November 13 afternoon.

Rajapaksa’s father and leader of the SLPP former president Mahinda Rajapaksa, however, spoke in favour of Wickremesinghe’s budget.


Sri Lanka’s “forward-looking” 2024 budget will instill fiscal discipline: MR

While not without its shortcomings, the older Rajapaksa said, the 2024 budget is a forward-looking one that aims to ensure fiscal discipline and put Sri Lanka on the path to recovery. (Colombo/Dec07/2023)

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Sri Lanka ruling party MP contradicts poll to claim his party is overtaking president’s

ECONOMYNEXT – The ruling Sri Lanka Podujana Peramuna (SLPP) is rising from the ashes albeit at a slower than anticipated pace, while President Ranil Wickremesinghe’s United National Party (UNP) still commands only 1-2 percent of the vote, an SLPP legislator said.

MP S B Dissanayake, who is not a member of the cabinet of ministers headed by President Wickremesinghe, told reporters on Thursday December 07 that support for any major political party of the island nation is on a downward trend while the SLPP alone is gaining ground.

An independent poll by the Institute for Health Policy (IHP) however shows that this is decidedly not the case. Polling data for October showed that the leftist National People’s Power (NPP) had enjoyed support from 40 percent of likely voters, having dipped 2 percent from September, while the main opposition the Samagi Jana Balawegaya (SJB) stood at 26 percent, increasing four percent from 22 percent in September. President Ranil Wickremesinghe’s UNP’s support decreased marginally to 11 percent in October from September’s 13 percent. The SLPP also saw a decrease to 5 percent from the previous month’s 8 percent.

“You can’t gamble with elections. The election must be held. We always say electrons must be held. The presidential election must be held next year. There is no alternative,” said Dissanayake.

“Parliamentary elections can be called if needed. But that’s not how it is with the presidential election. Nominations for that will have to be called by September, October next year,” he added.

Asked by a reporter if the SLPP is ready for elections, Dissanayake acknowledged that support for his party had eroded, to nothing.

“We crashed to zero. We were turned to ashes. But we will rise from those ashes. We’re not where we thought we were. The 6.9 million [votes received at the 2019 presidential election] no longer applies. We’re at about half of that. But we’re rising, like this,” he said, gesturing upwards.

“As other major parties go in the opposite direction, we’re rising slowly. But the UNP is not. It’s still on the ground, and still at 1 to 2 percent,” he claimed.

“The SLFP is there too. Those who left us are the same. Even together they cannot form 1 percent. But we’re climbing,” he said. (Colombo/Dec07/2023)

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Sri Lanka president appoints main opposition MP advisor

ECONOMYNEXT – Sri Lanka President Ranil Wickremesinghe has appointed MP Vadivel Suresh as a Senior Advisor aimed at “fostering the integration of Hill Country Tamils into Sri Lankan society”, the president’s office said.

A statement from the President’s Media Divison (PMD) said Suresh’s “pivotal role will centre around overseeing the comprehensive integration of Hill Country Tamils, particularly focusing on the districts of Badulla, Nuwara Eliya and Rathnapura”.

“The Senior Advisor will play a key role in coordinating various initiatives related to the welfare of Plantation Companies, the promotion of women, safeguarding children, addressing disparities in Tamil schools and upgrading the delivery of health services,” the statement said.

In May this year, Suresh, who represents the main opposition Samagi Jana Balawegaya (SJB) in parliament and also serves as the general secretary of the Lanka Jathika Estate Workers’ Union, made headlines when he issued an ultimatum to opposition and SJB leader Sajith Premadasa, demanding an apology for a perceived slight on the Indian-origin Tamil community that Suresh represents. He also spoke favourably of President Wickremesinghe, hinting at a possible cross over.

Sri Lanka’s Indian-origin Tamils, most of whom have historically worked in the plantation sector and live in dire conditions on wages widely considered unacceptably low. Speaking at a May Day rally, the Badulla district MP said Premadasa must apologise to the estate Tamils for allegedly snubbing them at an event in Madulsima that he failed to attend.

“I would like to say to our leader, sir, do not take us for granted,” said Suresh.

“If you need us to stay with you, come right now to Madulsima and apologise to my people and then we shall restart our journey. Otherwise I won’t be part of that journey. There will be no Vadivel Suresh. If you don’t apologise to my people, I won’t be with the SJB,” he said.

Making matters worse, the MP also expressed a willingness to join President Wickremesinghe if he was able to raise the daily wage of plantation workers and resolve their grievances. He also said the president has been successful in containing the disruptions caused by the currency crisis.

“On this May Day, we say to both the opposition leader and the president, I and my people would join hands with a leader that worked to increase [estate workers’] wages and give them [access to the Samurdhi welfare scheme] and include them in national policy,” he said. (Colombo/Dec07/2023)

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