Reforming and privatizing state-owned enterprises in Sri Lanka

Photo by Masakatsu Ukon (license CC BY-SA 2.0).

When governments manage businesses, they lack the profit and loss signals that free markets provide, leading to vast losses and inefficiency. Sri Lanka’s state-owned enterprises (SOEs) have been chronically inefficient and wasteful, but Atlas Network partner the Advocata Institute, based in Kotte, is helping to change things. The Sri Lankan government has begun privatizing its SOEs and has announced plans for moving even more SOEs into competitive markets, a move spurred by the Advocata Institute’s convincing policy research and advocacy.

A late November article in the weekly Sri Lankan newspaper the Sunday Leader cited the Advocata Institute’s research findings that SriLankan Airlines “was the country’s third-largest loss-making State-Owned Enterprise (SOE) from 2006 to 2015,” accounting for “over a fifth of the total losses of the country’s SOEs (categorized as strategically important by the treasury) from 2006 to 2015.”

The Sri Lankan government announced in August that it had far-reaching privatization plans for Sri Lanka’s SOEs because “in the hands of the private sector, they can earn more profits,” explained the country’s development strategies and international trade minister, Malik Samarawickrama, as reported in Sri Lanka’s Daily Mirror.

“According to Advocata, an independent policy think tank, 55 strategically important SoEs in Sri Lanka have made a cumulative loss of Rs.636 billion [about US$9.4 billion] during 2006 and 2015,” the Daily Mirror reported in August. “The cumulative profit of the profitable SoEs during the same period has been Rs.530 billion [about US$7.8 billion], excluding the Employees’ Trust Fund. The statement by the minister suggests that the government is ready to go the whole hog in privatizing both the strategic as well as non-strategic SoEs despite the immense political risk forthcoming.”

Samarawickrama noted that the government had already reached the final stage of “entering into a public-private partnership (PPP) to restructure the loss-making national carrier, SriLankan Airlines,” although the private partner in that venture had not yet been disclosed. In December, Sri Lanka’s Daily FT reported that Super Group Partners Company Ltd., a joint venture between Trans Maldivian Airways and Singapore Airport Terminal Services, was the leading firm in airline partnership discussions. SriLankan Airlines has also begun smaller partnerships with other private firms, such as leasing some of its aircraft to Pakistan International Airlines, reports Business Traveller.

Advocata’s landmark report “The State of State Enterprises in Sri Lanka” has been widely influential in this ongoing reform process.

“Airlines used to be regarded as a key part of transport infrastructure, like roads or bridges, which should be owned by the Government,” wrote Ravi Ratnasabapathy, an Advocata fellow, in the report. “Until the mid-1980s, most governments did own airlines and protected flag-carriers by restricting new entrants. This thinking has changed. Privatisation made air travel more competitive and liberalisation brought competition from low-cost carriers. Most airlines in state control have failed to adapt and are losing money. There is little strategic interest in owning an airline; Switzerland and Belgium have done without a flag carrier for years. The SriLankan airline is currently a huge drain on the treasury and the previous experience with Emirates demonstrates the clear benefit of privatization.”

An online poll conducted earlier in 2016 by Sri Lankan media platform Roar showed popular support for opening SOEs to market competition, with “an overwhelming majority saying that Sri Lanka cannot move forward without at least some form of privatization.”