Time to ensure State enterprises deliver value to the public

The former administration, unlike any other previous regimes, made a conscious effort to extend its dominance in many economic spheres. All governments in Sri Lanka in the last 25 years have in many forms tried their hand in running commercial enterprises. Overall, it has been a terrible experience and a costly exercise for the taxpayers.

The revelations by the Prime Minister of the total mismanagement within SriLankan Airlines is a case in point. For example the Board of Inquiry found evidence of former Chairman Nishantha Wickramasinghe and ex-CEO Kapila Chandrasena falsifying documents to lease a luxury sports utility vehicle for the use of Wickramasinghe. The purchase of vehicles pales into insignificance when compared to irregularities in the re-fleeting exercise.

Role of the State
The general thinking worldwide nowadays, especially after the financial crisis, is that government should not run commercial enterprises, no matter whether they are profit-making or not, and the government should only limit its involvement to simply running essential public utilities. We all know it’s not the government’s job to run businesses. It should act as a regulator and facilitator.
Over the years successive governments have dumped hundreds of millions of rupees just to prop up loss making State-run corporations and as a result increased our public debt many times over. Public sector companies need to completely overhaul their culture and practices if they are to match the performance of their private-sector counterparts and even become world-class players. Some have succeeded globally, most have failed.

Why do state enterprises fail?
Governments usually fail in business because politicians, not business executives, run governments. Politicians can only make political decisions, not economic ones. They are, after all, first and foremost in the re-election business. Because of the need to be re-elected, politicians are always likely to have a short-term bias.

What looks good right now is more important to politicians than the long-term consequences, even when those consequences can be easily foreseen. Most politicians therefore tend to favour parochial interests over sound economic sense, while markets will always deal efficiently with shortages and gluts. Politicians, as we all know too well, need big headlines; letting the market work doesn’t produce favourable headlines and, indeed, often produces the opposite.

Then, governments use other people’s money to run businesses. Companies have to manage with their own money. Generally, cost management does not work well with bureaucracies. Indeed, when cost efficiencies are inescapable, bureaucracies often make cuts that inconvenience the public, generating political pressure thereafter to reverse the cuts.

Freedom to operate
Usually, the CEO of a private sector company has the power to manage independently. He sets the policy, recruits the right people, and allocates resources very much as he thinks best to achieve the set objectives for the year. The board of directors generally does nothing more than reviewing the strategy, the risks, challenge some of the initiatives of the CEO and then ratify his moves, and will certainly fire him if he fails to deliver the promised results. This allows a company to act quickly when needed.

The next issue is the government is regulated by the government. It is the government’s job to make and enforce the rules that allow a society to function effectively. But it has a dismal record of regulating itself. Therefore, while we all know capitalism isn’t perfect. Indeed, to paraphrase Winston Churchill’s famous description of democracy, it’s the worst economic system except for all the others. But the inescapable fact is that often it is the profit motive and competition that help to keep enterprises lean, efficient, innovative, encourage meritocracies and stay customer-oriented.

Regulator
For example take the five big loss makers which were once categorised as the ‘biggest monsters’ by Minister Sarath Amunugama; they have made operating losses amounting to billions of rupees. This is however not new for Sri Lanka. Many public enterprises continue to make big losses and get away with total impunity.

For instance, the two transport enterprises, Railways and SLTB, have made operating losses year after year since 2000, amassing cumulative losses of billions of rupees. If a private company ran them, they would have been rendered bankrupt many years ago. However, all these enterprises have been able to continue their business because the taxpayers have been forced to fund these institutions.

Either way, it is the public who has to bear the burden of such losses eventually. This is why many people do not want the government to run businesses, simply because they are not good at doing that. Instead they want them to act as a regulator and as a facilitator and leave commercial enterprise for the private sector to manage.

The committee that was set up to do oversight of State enterprises, COPE, has also done very little to improve the management and performance of enterprises. The intention of the committee was to ensure the compliance of financial discipline and proper management in public corporations and other semi-governmental bodies in which the Government of Sri Lanka has a financial stake. There over 60 institutions from banking, transport, shipping, hospitality, healthcare, water, aviation, construction and plantations that come under the purview of the Parliamentary Committee of Public Enterprises (COPE).

Restructuring
The allocation of these enterprises to ministries also needs change. If any reallocation of institutions to ministries is being considered in the future, it would be prudent to allocate them on the basis of similarity of subjects. At present subjects and institutions have been allocated to ministries illogically.

For example, all institutions under the Banking and Finance sector (excluding Employees Trust Fund Board), all institutions under Insurance and Lotteries and Hotel Developers Lanka Ltd. (under Marketing and Distribution), Lanka Hospitals Ltd. (former Apollo Hospital) have been allocated to the Ministry of Finance and Ministry of State Enterprises.

The Appointing Authority to many of these institutions is the Treasury. But the Central Bank of Sri Lanka, which regulates all banks and financial institutions, is under the Ministry of National Policy and Economic Affairs. Thus the financial policy of the Government has to be implemented by two totally different ministries. This may result in conflicts of policy. It would be prudent to cluster the Central Bank and all State banks and Financial Institutions under a single Ministry. Allocation of the institutions under Insurance and Lotteries to this same ministry may be considered for purposes of rationalisation.

Similarly, other State-Owned Enterprises can be allocated to Ministries with related functions. For example, the institutions under Health can be slotted in under the Ministry of Health while the Ministry of Media can have the institutions named above under it. This clustering of institutions with similar functions in one Ministry will automatically ensure the concentration of experts in that field in that Ministry and synergy. It will enable the Minister in charge to strategise the further development of the functions and optimise the income generation potential of the institutions under him.

Another important factor is the marketing and promotional budgets of each of these institutions. The State banks, Sri Lanka Insurance Corporation, National Lotteries Board and Development Lotteries Board have over Rs. 1 billion of marketing budgets among them. Thus the Minister in charge of these institutions wields huge influence over the entire country through these budgets

Way forward
Despite the wave of privatisation across developing markets in the 1980s and ’90s, State-Owned Enterprises continue to control vast swathes of national GDP: more than 50% in some African countries and up to 15% in Asia, Eastern Europe, and Latin America. These companies, controlled by a government or a government agency, struggle to meet the private sector’s performance levels, and potential profits remain unrealised. During the current downturn, some State-Owned Enterprises—even as they face increased pressure to become more efficient—have been called on to support government stimulus plans through higher spending and job retention. Nonetheless, research suggests that notwithstanding the constraints of the public-sector model and the tough economic times, these enterprises can significantly improve their performance.

Even in normal times, for example, the average return on assets at state enterprises is less than half that of the private sector, a McKinsey study showed a few years ago. One reason is that many such companies, in elsewhere, are shielded from competitive pressures, but other factors like skills and systems contribute greatly as well.

State enterprises often juggle multiple, unclear, or conflicting financial and social objectives. Political interference can prompt decisions that threaten a company’s financial goals. Finding talented workers at all levels is a problem too: the best and brightest gravitate toward the more lucrative private sector, and the tenure-based promotions common at state enterprises can conceal their best internal talent.

Yet there is hope like some markets have demonstrated. Some State-Owned Enterprises in emerging markets are closing the gap with their private-sector competitors. Petronas, the State-owned energy company in Malaysia, for example, began an operational-excellence campaign focusing on improved technical capabilities and a more effective working culture at its plants. After five years, the initiative delivered upward of $ 1 billion in savings and new revenues.

In the final analysis, if the Government is serious about driving up performance, the Government needs to play a bigger role in creating the right environment for State enterprises to excel, they need to support the better-performing State enterprises and draw from well-known best practices in the private sector, therefore they need to concentrate on the three areas of specific importance in the public sector: clarifying objectives and securing an explicit mandate, focusing scarce resources on areas with the highest financial impact, and redefining the talent proposition.

Dinesh Weerakkody
The writer is a HR Thought Leader.