SOEs need competent officials, not political appointees: Dr. PB

* From contributing Rs. 32bn in profits eight years ago, state enterprises now burden economy with Rs. 107bn in losses

The combined losses of 55 state owned enterprises (SOEs) grew 432 percent to Rs. 107.1 billion in 2012 from a profit of Rs. 32.3 billion in 2005 and up 48.6 percent from a loss of Rs. 72 billion in 2011, data released yesterday (03) by the Ministry of Finance and Planning showed.

According to the Treasury annual report released on Monday, profits and dividends to the government from the 55 SOEs have largely come from banking and financial institutions and few other enterprises, "while all the other large enterprises have refrained".

"The analysis undertaken with regard to SOEs indicates that their capacity to generate a higher contribution to the government by way of profits and dividends could be as high as 2 percent of GDP in the medium term as opposed to 0.5 percent at present," the Treasury said.

It said the government having understood the crucial role played by SOEs had invested heavily on them in the last few years.

"However, the expansions in the state enterprises should also be supported with other various reforms such as allowing greater commercial freedom, ensuring the appointment of competent managerial staff and improving corporate best practices and accountability through the boards of directors and senior management personnel.

"Despite improvements in governance, operational aspects and in the timely submission of annual accounts, primarily due to close scrutiny by COPE and the intense monitoring of the Treasury, the performance of many of the SOEs needs to be strengthened to break from the past era of suboptimal operations and to move on with efficient and profitable scale of operations since the government has invested heavily on many of these SOEs in recent years," the Treasury said.

It said the suboptimal performance and weak financial position of the SOEs, particularly the CEB and CPC, has created various imbalances in the economy.

"The performance of most SOEs continues to reflect operational deficiencies such as the limited capacity to adjust output prices to reflect market conditions, inadequate separation of business and social development goals, inadequate corporate freedom in business management and accountability.

"The inability to separate business focus from the social objectives continues to act as detrimental to the performance of SOEs. These enterprises therefore continue to provide very low returns on investment and have often rely on budget support and bank financing. Many of these issues have also been identified by the Committee on Public Enterprises (COPE) of the Parliament as well.

"In this context, considerable innovation is needed to improve the finances of most SOEs to complement and get the maximum benefit of on-going fiscal deficit reduction policy and broad-based development strategy.

"Key enterprises also depend on the borrowings from state banks instead of raising internal fund generations, which crowd-out the private investments and jeopardize the stability of the entire financial system. This remains a major concern in public financial management and overall economic performance of the country. Since the losses of SOEs are mainly due to non-cost reflective pricing policies and operational inefficiencies, there is a need to correct them urgently to ensure financial viability and increased business dynamism in these enterprises.

"Hence, the provision of generalized subsidies through below the cost prices on basic needs, such as fuel, energy, transport and water, needs to be approached through well targeted subsidies to those needy as Sri Lanka has graduated to a middle income country status. The recent upward revision of administrative prices in petroleum, and electricity to move towards cost-effective pricing has to be reviewed in this context.

"It should be noted that heavy inbuilt cross subsidy beyond the lower end of consumers are still maintained in the prevailing price structure. In addition, other adjustments also have to be introduced by SOEs without further delay to enhance their efficiency and productivity thereby phase-out the exceptionally high losses in order to support the envisaged high economic growth of over 8 percent through increased national savings and investments," Treasury said.

How they performed...

The Ceylon Petroleum Corporation which reported a Rs. 9.8 billion profit in 2005 sustained a Rs. 89.6 billion loss in 2012. The CEB, reported a loss of Rs. 6.8 billion in 2005 which grew to Rs. 61.1 billion in 2012.

The National Carrier, which made a Rs. 834 million profit in 2005, incurred a Rs. 25.9 billion loss in 2012. Budget carrier Mihin Lanka, which did not exist in 2005, saw losses increase from Rs. 1.9 billion in 2011 to Rs. 2.8 billion in 2012.

The Sri Lanka Transport Board which reported a Rs. 1.1 billion loss in 2005 saw losses increase to Rs. 4.6 billion in 2012.

The Agriculture and Agrarian Insurance Board saw losses increase from Rs. 98 million in 2005 to Rs. 4.8 billion in 2012.

The Janatha Estates Development Board made a loss of Rs. 135 million in 2005 which grew to Rs. 252 million in 2012.

The losses made by a majority of the SOEs outdid the commendable performance of the few who continue to function as profit making entities.

The country’s largest bank, state-owned Bank of Ceylon saw profits grow from Rs. 3.12 billion in 2005 to Rs. 19.8 billion in 2012. People’s Bank profits grew from Rs. 4 billion to Rs. 15.2 billion.

National Savings Bank profits increased from Rs. 3.4 billion in 2005 to Rs. 6.2 billion in 2012.

The Pradeshiya Sanwardana Bank saw profits increase from Rs. 658 million to Rs. 1.5 billion.

Sri Lanka Insurance Corporation profits reached Rs. 2.9 billion in 2012 from Rs. 1.2 billion in 2005.

The Sri Lanka Ports Authority saw profits fall from Rs. 13.2 billion in 2005 to Rs. 5.3 billion in 2012.

The Airport and Aviation Services (Lanka) Ltd saw profits rise from 670 million in 2005 to Rs. 4.8 billion in 2012.

Lanka Sathosa Ltd which incurred a Rs. 4 million loss in 2005 made a Rs. 47 million in 2012.

The Development Lotteries Board saw profits grow to Rs. 2.3 billion in 2012 from Rs. 1.2 billion in 2005.
http://www.island.lk/index.php?page_cat=article-details&page=article-details&code_title=80510

It has been the practice of successive governments to appoint their cronies to top positions in public enterprises and in May last year, Treasury Secretary Dr. P. B. Jayasundera said the government should desist and appoint competent people to run state-owned enterprises instead.

"These officials should be removed and replaced by competent officials. The Treasury is not the appointing authority. It is up to the government to take this matter seriously. Policy makers need to put party politics aside and assume the role of custodian. These SOEs have the potential to reap good profits. We need officials who will put the interest of the country first," Dr Jayasundera said when the 2011 annual report was launched.

The previous report too highlighted the state of affairs in public enterprises:

"Undermining good governance practices, some entities take important decisions specifically in the absence of Treasury representatives or not in proper consultation with the line ministry nor the Treasury. Despite circular instructions, in some instances board sub-committees, particularly the audit and the management committees which are useful in ensuring best practices in corporate governance are not functioning or have not been appointed. This has marked a clear deterioration of the internal control systems of SOEs," the Treasury’s 2011 annual report said.
http://www.island.lk/index.php?page_cat=article-details&page=article-details&code_title=80511

maybe they can start with SEC.

I know it's not an SOE but considering it's importance in the system its paramount to have competent, honest and experienced staff without political interference.