May 25, 2016 Print

Government agencies are insulated from the profit and loss signals of dynamic markets, so state-owned enterprises (SOEs) tend to be chronically inefficient and wasteful, hemorrhaging taxpayer money without providing competitive products and services. Advocata Institute, an Atlas Network partner based in Sri Lanka, has released its first comprehensive report, “The State of State Enterprises in Sri Lanka,” which breaks down SOE efficiency statistics. Only 22 percent of Sri Lankan SOEs have made financial data available to the public, the report notes.

“Fifteen percent of the work force in Sri Lanka are employed at state own enterprises,” said Dhananath Fernando, chief operating officer of Advocata Institute, who participated in Atlas Leadership Academy’s Think Tank Leadership Training in November 2015. “This 15% is often the chief wage earners of the households, so approximately 20 percent to 30 percent of the entire population is somewhat dependent on SOEs. The other 70 percent just pay taxes for these SOEs, which are poorly managed and largely loss-making. So SOEs is a critical and a vital area in Sri Lanka. In all elections at any level, the SOEs become a key topic and politicians tend to give rosy promises because this covers a vast majority of their voting base. As a result of that, the government has become bigger and bigger and more taxes have been imposed to cover the losses.”

The perverse incentive structures of public-sector bureaucracies lead to decisions that are based on political favoritism and expediency, the report explains, rather than the economic signals of supply and demand. These short-term considerations circumvent long-term productivity and efficiency, usually leaving SOEs operating at a consistent loss.

“If a business does not earn a profit, the owner will need to keep infusing funds and this provides a powerful incentive to improve efficiency,” wrote Ravi Ratnasabapathy, a fellow with Advocata Institute, in the report. “The general public, whose money is effectively at risk in a state venture do not have the wherewithal or knowledge to hold managers or politicians to account. Politicians would prefer to postpone hard decisions than risk personal unpopularity, which is why state enterprises can keep running losses year after year.”

The report includes a Q&A session with Razeen Sally, chair in political economy and governance for Malaysia-based Atlas Network partner Institute for Democracy and Economic Affairs (IDEAS). Sally compares the SOE situation in Sri Lanka with other countries throughout Southeast Asia.

“In most parts of the world state enterprises fail because there are disincentives to competition,” Sally said. “They are shielded from competition. They have a close link to the state. They are highly politicized. Appointments are not made on merit. The market is rigged in their favour, on prices and on pro-duction. Often they are protective from international competition as well as domestic competition. For all those reasons they fail. And they are a drag on the economy, on the exchequer and on consumers — they limit competition.”

Ultimately, Advocata Institute hopes that “The State of State Enterprises in Sri Lanka” will generate enough attention in media, government, and intellectual circles to spur an open accounting of SOE operations and lead people to demand de-politicized accountability from government officials.

“The project provided the spark for us to rethink the losses made by SOEs, and the amount of cash outflow that the taxpayers need to bear,” Fernando said. “It has also provided media exposure that allows us as a think tank to be on the map and build credibility. In terms of freedom for people in Sri Lanka, the privatisation process would be a clear win if it passes. This would be immensely helpful in shifting public opinion to a more open, liberal economy.”