Sri Lanka’s counterproductive nationalism

Apr 04, 2010 (LBO) – This is an election special. There is value in analyzing election messages. Whether positive or negative, such analysis advances debate and understanding. As said elsewhere, elections are teachable moments.

And a note to the candidates: “Publicity, darling. Just publicity. Any kind is better than none at all.” (As said by one of Raymond Chandler’s characters).

Metaphorical monopolies

Thilanga Sumathipala, UPFA Candidate in the Colombo District, claims credit for “breaking the telecom monopoly.”

I was at the table in 2002-03 when he, as Chairman of Sri Lanka Telecom (SLT), fought tooth and nail to hold on to SLT’s misbegotten international telecom monopoly that was enriching illegal call terminators and those who facilitated their activities.

That monopoly was broken over his objections. It was not fully implemented, but today we have a BPO industry and cheap international calls; from a trough in investments in 2000-2002, we reached a peak in 2004-08. Good things happened because he was overridden.

So what was this monopoly that Sumathipala broke? According to his campaign material, “an entity that was dependant (sic) on foreign experts was localized by the recruitment of local experts. This generated a saving of over 50 million rupees, which was used to upgrade Sri Lanka Telecom . . .. Another feature of his leadership was in obtaining the first mobile telecommunications network for the Sri Lankan government . . .. Mobitel is seen as the sole player to break the international monopoly on the mobile telecommunications sector . . ..”

Quite something else. Not monopoly in the commonly understood sense, where the number of suppliers of a service is limited artificially, resulting in high prices, low quality and not all who want the good or service being served.

But this breaking of monopolies is metaphorical, whereby foreign personnel were replaced by locals and foreign-owned companies saw market share and revenues taken away by locally owned companies.

The results

Sri Lanka Telecom, a company still retaining many advantages from its monopoly days, suffered a loss of LKR 379 million in the last quarter of 2009 but ended the year with a net profit of LKR 785 million, a decrease of 89 percent from 2008. Mobitel, SLT’s mobile arm, made a loss of LKR 395 million despite sales growth.

It is true that the management contract given to Japanese investor was terminated when Sumathipala headed SLT. It is also true that SLT while he was Chair bought out the Australians who held 50 percent ownership of Mobitel and the right to manage it. But both companies were profitable and SLT was a net contributor to the government from when it was a government department. Now, with the job done by Sumathipala, they too have joined the club of loss-making government organizations.

In his defense, it must be stated that SLT made good profits for several years after Sumathipala’s management changes, even though Mobitel lost money for the first two years under the first CEO he appointed. The strategies of the new management team resulted in market share and revenue gains in the short term, but took the entire industry, including the parent company, down in the longer term. It is not only Mobitel that is losing money now, the entire industry is.

Does this suggest that Sri Lankans cannot manage technology companies? No. In 1998, of the seven major telecom operating companies, only one had a Sri Lankan CEO. He was a young man, not yet 30, in charge of the newest entrant. That company is today one of the largest companies in the country and the market leader in mobile. Today, there are at most two foreign telecom CEOs in the industry.

What this suggests is that Sri Lankan managers appointed by politicized and unaccountable boards cannot manage well. If you take the government out of SLT, Sri Lankan managers should be able to manage it.

So what exactly was the job done? The management of most telecom operators became local, naturally, except for SLT and Mobitel. SLT is 45 percent foreign owned and because Mobitel is fully owned by SLT, it too is 45 percent foreign owned. By removing a foreign management team that was put in place as a barrier to political interference, Sumathipala may have saved LKR 50 million then, but he cost the company (and in the end, the government and the citizens of this country) many multiples of 50 million in foregone profits and losses in subsequent years.

People who get their kicks doing business with locally owned telecos should give their money to Lanka Bell, the only fully Sri Lankan owned operator at this time, though that may change anytime if the right price is offered. Those who place value in doing business with companies that have Sri Lankan CEOs have a much broader choice. But for those who like financially stable, profit-making companies that are investing heavily in future services, there are none.

The limits of nationalism

The President’s manifesto is applicable to the General Election as well. He wants baseline GDP growth of eight percent. He wants Sri Lanka to be a “Naval, Aviation, Commercial, Energy and Knowledge hub.”

Neither of these objectives can be achieved without foreign investment and foreign skills. We need more capital from outside because we do not save enough and we will not get concessional loans. We need more foreign experts because our productivity is low and we cannot survive in the global economy without changing that.

Those running on the President’s manifesto, and even the President himself, should understand these truths. There is no way you can continue to demonize the West and achieve eight per cent growth. The cheap populist payoff, if there is one, is not worth the real cost. There is nothing abstract about this: Just look at what’s happened to what used to be the most successful sector in the economy, telecom.