Public Enterprise Reform: Sri Lanka Economic Summit 2016.
By Mangala Samaraweera.
When the National Unity Government was elected just over a year and a half ago the Sri Lankan economy was at the precipice with economic stagnation, international isolation and even a forcibly imposed international inquiry into allegations of war crimes around the corner. Together, these circumstances forced the then government to call a snap presidential election when it still had two full years left in its term. This election was meant to send a strong signal to emerging pro-democracy movements in Sri Lanka and the international community that, despite allegations to rampant corruption and nepotism, the government remained popular.
Under the previous government the economy and employment stagnated. I need not to go into details but allow me to share a few key statistics that are a snapshot of the situation just 19 months ago. The number of Sri Lankans searching for jobs remained roughly the same between 2009 and 2014. Exports as a percentage of GDP declined to 17 percent in 2014, down from 33 percent in the year 2000. Our foreign debt, used for wasteful projects like the Mattala Airport, reached critical levels.
If that was not bad enough, an economic crisis was looming over us. Relations with our largest export markets, including the US and EU which account for over half our exports were in a precarious state. Thanks to the previous government’s atrocious human rights record we had already lost GSP+. Department of Commerce statistics show that in the six years since Sri Lanka lost GSP+ the total loss of export revenue was 150 billion rupees. That sum is four times the education ministry’s entire budget in 2014. In addition, 150,000 people were made unemployed because of losing GSP+. The effects of the now lifted fish ban, although on a smaller scale, were similar. The worst was yet to come. Following consistent debacles at the Human Rights Council, in addition to the OISL international investigative report that was to be tabled in 2015, the road was paved for targeted sanctions and travel bans. This would have constituted the tipping point of a domino effect that would have more than wiped out the economic dividends of ending the war.
Ladies and gentlemen,
The National Unity Government is now putting in place the framework for democracy, reconciliation and development. This framework will break-through Sri Lanka’s post-Independence malaise of consistently missing opportunities and simply doing too little too late. We have made great strides in the areas of democratisation and foreign affairs. We are making progress on reconciliation. The framework for the reconciliation process will be in place once the mechanisms outlined in the Geneva Resolution, which brought us a tsunami of international good will, and the new constitution are implemented. The new constitution will entrench the changes we made under the 100 Day Work Programme and will help ensure that Sri Lanka is truly united and at peace for generations through a constitution that enshrines our multi-cultural, multi-ethnic, multi-lingual and multi-religious character.
The next major challenge for Sri Lanka is development, particularly generating growth and employment. We need to provide a peace dividend to our people; they need to feel that year-by-year their pockets are fuller and their standards of living are better.
As is now well known, over the last decade, we have focussed our energy on our domestic market of 20 million at the expense of the tremendous opportunities we have due to our location at the centre of the Indian Ocean and at the Gateway to the Indian Sub-continent. But to secure the dividend we need and deserve, this government is finally beginning to leverage our location. We are securing concessionary access to nearly half the world’s population and some of the fastest growing markets. We are paving the way for investment in critical infrastructure in the Western Province, Hambantota and Trincomalee. And we are creating a Financial City that will make Sri Lanka a financial services hub for the Indian Ocean Region.
But that is not enough. If we are to truly achieve the breakthrough that Singapore, Korea and the other East Asian Tigers experienced we need to reform our public enterprises. There are three main reasons for this: reforming public enterprise is critical for, one, improving Sri Lankan living standards, two, improving our competitiveness and, three, reducing corruption in politics and government.
Public enterprises in Sri Lanka are largely loss-making because they are corrupt and inefficient. They suffer from chronic conflicts-of-interest, politicisation and are captured by vested interests. Take the case of Sri Lankan Airlines: although the government at the time made it out that the re-nationalisation was an act of nationalistic fervour and portrayed it as a patriotic gesture, the true motivation for the nationalisation was to abuse and use the airline for their whims and fancies.
The result was that Sri Lankan Airlines, which after privatisation started paying dividends to the Treasury for the first time, again reverted to making losses the year it was re-nationalised. In 2008 Sri Lankan Airlines made a profit of around 40 million US dollars. But within seven years this once profitable airline had lost nearly a billion US dollars. That is, over seven years, each and every citizen of this country lost 5000 rupees in order to pay for waste and corruption.
The cumulative losses of the largest five public enterprises are over 600 billion rupees, more than the entire Health Ministry and Education Ministry budget combined. This is money that could have been used to provide English, Maths and IT teachers , provide vocational training and train doctors; not to mention upgrading our buses and public transportation systems. Or it could have been used for direct cash-transfers and employment schemes for the most vulnerable in society.
In addition to crowding-out critical government expenditure, failure to reform public enterprises also leads to higher costs for households and a lower quality of service for citizens. Take electricity: Sri Lankan households that are just above the minimum bracket pay some of the highest electricity prices in the world. Their quality of service is abysmal due to regular, unplanned power-failures. Take public transport: our railways and public buses are over-crowded, don’t run on time and are the cause of nightmares for women who are harassed on a daily basis.
Third, the monopoly positions of public enterprises prevents us from becoming competitive. High energy costs, poor public transport and an under-funded education system are not the right ingredients for competing against the new generation of East Asian Tigers like Vietnam. Where we have opened up to competition Sri Lankan firms have thrived. The liberalisation of the banking and LPG sectors means that Sri Lankan firms now compete with their rivals not only in Sri Lanka but in Bangladesh and Myanmar, the liberalisation of the Port means that Sri Lankan firms are operating ports in Fiji and similarly the reform of Sri Lankan Airlines, before the fatal re-nationalisation, was helping make Sri Lanka a regional aviation hub.
What is the way forward? Here I draw from my experiences as Minister of Telecommunications in particular, in addition to my time as Minister of Ports and Aviation. Reform is most often successful when it is sequenced properly, and I think there are three steps that we need to take:
First, bring in competition. The breakthrough reform in Telecoms was allowing two private sector players to enter the market. Competition not only directly benefitted consumers by cutting prices, improving quality and increasing choice; this competition helped reform SLT and enabled Sri Lanka’s telecommunications boom.
The second step is as critical. When I was made Telecoms Minister, the Ministry of Telecommunications had operational control over Sri Lanka Telecom. We also set policy for the industry and we regulated it. However, thorough the reform process we introduced good governance and limited these conflicts of interest.
In other words, we tri-furcated operations, policy-making and regulations. We handed over management control to NTT, a Japanese telecoms firm, and in the second stage of reforms reduced the government’s stake to below 50 percent. We also created a independent Telecommunications Regulatory Commission to regulate the industry to which eminent, independent persons like R.K.W. Goonesekere, Deva Rodrigo and Norman Gunawardene. In hindsight, considering the trend to appoint ex-Telecom officials to the regulator, perhaps we should have made the regulator more independent and answerable to Parliament instead of the Minister. But, all in all, these good governance reforms allowed the Government to focus on its real responsibility of setting policy without being distracted. We didn’t try to run a telephone company, we created the policies that created a level playing field and transformed communication in Sri Lanka. This is why to this day Sri Lanka Telecom continues to pay dividends to the Treasury and not be subsidised by the tax-payer like in India and Bangladesh.
The results of these reforms speak for themselves. In 1995 one in a hundred households had a telephone line, just fifteen years later, in 2010 as teledensity hit 100 percent, almost every Sri Lankan had a telephone. Moreover, in the 1980s 38 percent of telephone lines in the Greater Colombo area were out of order at any given time. Applicants on waiting list for connections, about 250 000, exceeded the number of existing lines and waiting periods were on average a decade long. Similarly, as most of you will remember, when competition was introduced into the international calling market in 2002, prices fell dramatically to the benefit of consumers.
Critical in ensuring the success of the reform process was by-passing vested interests and engaging directly with the real stakeholders that had an interest in SLT’s success. We by-passed union bosses and spoke directly to workers. We found the home addresses of the 8500+ SLT workers and sent letters explaining the benefits of reform, including an employee share ownership scheme that accounted for 3.5 percent of total shares, to workers’ wives and families. That made sure that the letters weren’t withheld by the union hierarchy that were protecting their own interests. We also helped union leaders and workers understand the benefits of our reforms by sending them on fact-finding tours abroad. As a result SLT experienced one of the smoothest and most successful reform processes in the developing world.
But that did not mean there was no political pressure. There was a lot of it: but we had the courage of our convictions and we pushed the reforms through. And within a couple of years no one wanted to roll those reforms back.
In conclusion, as Sri Lanka embarks on its third-wave of reform allow me to distill my experience into three points. First, introduce competition. Second, limit conflicts of interest by decoupling operational control from policy-making and regulation. Third, ensure competitive operations by bringing in professional, independent management through management contracts and by listing stakes. I am confident that this tripartite reform framework commands the confidence of all stakeholders and will stand the test of time regardless of the government that comes to power.
However, as seen from the experience of SLT, introducing competition and and resolving conflicts-of-interest will by themselves go a long way, but if their full benefit is to be experienced by citizens, the Treasury and the country, then the government needs to entrench these reforms and prevent their roll-back by transferring ownership to the private sector on a case-by-case basis, especially in industries where a natural monopoly does not exist.