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What to do about incompetent state enterprises in Sri Lanka
10 Feb, 2014 09:32:13
By Rohan Samarajiva
Feb 10, 2014 (LBO) - SriLankan Airlines is expected to lose 25 billion rupees in 2013-14. In the previous year, it lost 22 billion rupees. This annual loss by one state-owned enterprise is more than double the amount doled out by the government in one year as Samurdhi payments.
The Lakvijaya coal-fired power station in Norochchalai has been shut down 26 times since being commissioned in 2011. Many explanations have been given including a claim that what the government paid for has not been delivered.

These are just twocontemporary examples of mismanagement of state-owned enterprises. Moreexamples can be provided from different administrations.

The futile blame cycle

The most common reaction is to blame the politicians in power, accusing them of malfeasance. But the accusations go nowhere. The politicians point their fingers at officials who signed the documents, generally retired. The officials claim political interference. Or there is a nice, unassailable Cabinet decision. No one is held accountable. The losses are borne by the public. And the cycle repeats.

Should the government be running airlines? An efficient, competent government like Singapore’s may be able to. But it has been obvious from Air Ceylon days that our government lacks the capacity to run one airline, let alone two. It is no shame. All the South Asian government airlines are hemorrhaging red ink, though perhaps no one has an airline that used to contribute to the exchequer (e.g., LKR 788 million in dividends in 2006) that now runs LKR 2,000 million plus in lossesyear after year, thanks to renationalization.

It is said that the China Mechanical and Engineering Corporation (CMEC) sold the CEB a sub-standard plant. But there are procedures for purchasing complex equipment. A large engineer-dominated organization is supposed to have a lot of in-house expertise.

But this was their first coal power station and they are all electrical engineers. Let’s concede they lacked the expertise. One can always hire consultants with the specialized knowledge. If this was not done, someone was negligent in their professional duty.

There are those who now recommend selling the coal plant for scrap. But no one asks why these kinds of wrong decisions keep being made.

Would it not be better to ask whether an organization that cannot properly specify what it wants, that cannot ensure that it gets what it wants, and possibly cannot maintain the plant that it gets, should be running a coal plant.

Merit of the Amunugama proposal

The proposal made by Deputy Minister of Finance Amunugamathat the plant be sold back to the CMEC and the power purchased seems eminently sensible. Now the Chinese Ex Im Bank gets the money plus interest and the CEB gets a dysfunctional coal plant it does not know how to fix.

Who knows the plant the best? If the company that manufactured the plant also gets to operate it, the chances of it working are that much greater. And they are not limited to employing electrical engineers.

Success in a modern economy depends on effective management of risk. For the sake of owning a coal plant its engineers do not understand, CEB is taking on all the risk. The Amunugama proposal shares the risk equitably. If their plant does not deliver electricity, CMEC will not get paid, unlike under the present arrangement where they are shielded from all risk.

And the airline (airlines)? They should be auctioned off. The landing slots in Heathrow may be worth something. If Malaysian Airlines fails to make money, that is of no concern to me as a passenger. But whether or not I fly incompetent Sri Lankan, I lose money as a citizen.

Actually, it might be cheaper for the government to sell off SriLankan and give every man, woman and child in the country a nice thousand rupee note with a picture of the President to compensate for the loss of pride. That’s just LKR 20 billion as a one-time payment. Now, we’re saddled with losses in the 20 billion range year after year.

When the state is incompetent, it should not take on too much. It should not run coal power plants or airlines. It should buy electricity and air travel under well-designed contracts. And it should get help even with the contracts.

Corrected - SriLankan Airlines is expected to lose 25 billion rupees in 2013-14. In the previous year, it lost 22 billion rupees.

Rohan Samarajiva heads LirneAsia, a regional think tank. He was also a former telecoms regulator in Sri Lanka. To read previous columns go to LBOs main navigation panel and click on the 'Choices' category.

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READER COMMENT(S)
13. ishanka May 27
Sri lanka airline loss is not only the one shown in the balance sheet, an opportunity cost can be included as well. SLn airline while under Emirates used to be a popular airline in Indian market.

With the fall of Malaysian airlines, we can gain a lot. Whatever the wrong SLn air line has, it is a zero accident one. We could have built of that reputation. (but wonder how long it can last). Our management is ruining this for us while being a burden on our people.

Sri Lankan airline doesnt even maintain the planes properly. Cockroaches inside planes, crew is rude and not properly trained. If this management cant even manage such things what is the point of them receiving salaries of 500,000+ that too with increments each year while the business makes losses each year.

By looking at Mihin air ads, one can see they are killing Sri Lankan air lines to maintain Mihin. For example i see competitions where if you travel in Mihin you win a ticket in SLn. Losses of Mihin is being passed into SLn. They are killing the national carrier to make mihin look good, of course something they've failed at.

One can wonder about the future of Mihin given that the person who is heading it now came from SLC which has became a national shame.

12. Rohan Samarajiva Feb 11
@Saman. You appear to have missed the main point I am making, which is that it is something more than individual malfeasance that is the cause of the problem. It is, to use a technical term, a structural problem.

Incompetent means "not having or showing the necessary skills to do something successfully," This is exactly the term that is needed to describe the actions of CEB and SriLankan.

If you had bothered to read to the end, you would have seen that I am not a journalist. If you read my columns over the years, you will see that I have no fear of speaking my mind.

11. Ranjan Feb 11
The CEB should be split into 3 separate companies. Power Generation, The national Grid and Retail. PG and Retail further split into multiple companies and sold. The grid to be kept as a national asset.
10. Saman Feb 11
What the heck are "incompetent state enterprises"?
Isn't it the officials who run them and the political leaders who appoint them that are incompetent?

Press freedom in Sri Lanka is such that journalists are unable to call a spade a spade anymore.

9. sam Feb 11
People in sri Lankan parliament have no idea how to manage the economy they are only looking after their relatives and friends , poor people are suffering but some how they are the people voting to get these people to the parliament, not a good look, no expatriate will come back unless they make county security moving these parliament tugs out..
8. jon Feb 11
There are ample sri lankan living in abroad who has acquired vast engineering expertise. Then can turn these loss bearing institutions to profit making institution and also without coal power then can introduce solar or wind. But they cannot becuase goveernment and hooligans wont give a chance accept their uneducated realtions and close associates. This is the biggest problem of sri lankans who nominated them to ruin the country. I personally tried this but unfortunately had to leave the country again because nothing efficient can be done in sri lanka.
7. Rohan Samarajiva Feb 10
For those who believe bringing expat Sri Lankans to run these enterprises is a solution:

Where did the current CEO of Mihin SriLankan come from? Not from among the ranks of people working inside the airline, or within the country (he ran marketing for SLT immediately upon his return and then shifted to the airline, if I remember right). He was an expatriate Sri Lankan returning to serve the motherland.

6. Niro Feb 10
Would a private business sustain itself for years with such colossal losses?

Govt (you and me - the taxpayers) incurs losses for the benefit of whom? It only the employees who benefit – salaries and all sorts of perks despite making losses. People of this country want the govt to run more businesses - not less. Therefore, govt keeps adding more to the loss making list – ports, airports etc.

The root cause is economic illiteracy among the public – belief that govt can run businesses profitably for the benefit of the people. This message has been perpetuated for generations by our beloved politicians.

These age old govt enterprises are totally against completion or privatization – which will make people work harder & smarter and will take away all the handsome perks they enjoy.

Privatization and competition for state enterprises in Sri Lanka is a pipe dream.

Keep dreaming ….

5. James Feb 10
There is ample talent in sri lanka and sri lankans living overseas. Get them to come and manage these loss making companies, rather than placing people for political reasons.There is limit to what you can take as losses.
4. Abdul Wahab Feb 10
Best Article, Sri Lankan Airlines making loss because they do not know how to do marketing properly. For e.g. Sri Lankan airlines seats are worse than Easy Jet Budjet Airlines. They are not adjustable fixed seats.

But they are not marketing to budget class consumers which is Mihin does. Sri Lankan airlines customers are middle class customers not budget. This is what happens when you give Accountant to do the marketing. Sri Lankan Airlines and Mihin Airlines should be sold to Sri Lankan investors not Foreign parteners in Stock Market.

The government should change the policy of not privatising state institutions. The government should reduce its stake by adding capital of 49% in each institution. CEB should be divided to five private companies. It should be sold to public. Government should only keep national grid and hydro electric plant. This would increase competition and reduce burden of people.

3. Jack Point Feb 10
An excellent article. It should be translated and disseminated in Sinhala and Tamil.

It is worth remembering that the Emireates stake was purchased for some US$54m, annual losses are now several times the purchase price!

Can we get two statistics on the most useful bits of infrastructure done to date - the two highways?

1. What is the interest cost on the project(monthly or annually).
2. What is the loan repayment on the project(monthly or annually)
3. How much is earned from the tolls?

2. Melvin Feb 10
Nice article on a topic which is critical to every Sri Lankan. Sadly, noone seems to be interested.

The COPE report (2012) found that four state-owned enterprises incur 98% of losses at Sri Lanka public institutions:

1. CPC
2. Sri Lankan Airlines
3. Mihin Air
4. CEB

Can't we get professionals to run these institutions instead of privatizing?

Political will is key to this - look at Singapore. But when will that day come?

1. fb Feb 10
The other option is to have an O&M contract with the Chinese company, (the turnkey contractor or equipment supplier for example)

Most large IPPs in Sri Lanka, which had less complex plants have an O&M contract with a qualified party.

A 5 or 7 year contract with a Chinese party would have allowed the CEB to build capacity.

Even now an O&M contract could perhaps be explored, especially for the other two plants.

Now that the plants have been built, it is better to learn to operate it somehow, since loan repayments are likely to be much cheaper than paying capacity charges.

Coal prices are also falling with the US dollar strengthening.