Sri Lanka’s natural experiment in state enterprise management

Nov 19, 2012 (LBO) – The government of Sri Lanka owns and operates two loss-making airlines. There was a time when the one poorly performing airline was partially privatized. Then in 2007/08, the government started a second airline and nationalized the first.

Performance in the periods prior to and after 2008 by the government airlines can therefore be assessed. Since both airlines are managed by the same CEO and Chairman and share most inputs, it is reasonable to consider it as one entity with two brand names.

Samurdhi is the largest social safety net program the government operates, benefitting 1.54 million families, according the 2011 Annual Report of the Ministry of Finance and Planning. It may be useful to compare the profits/losses of the government airline with those of this social welfare scheme.

Before the government got back into the airline business, the airline was profitable, declared dividends and contributed to government revenues. In 2008-09, it lost more money than the total spent on Samurdhi. Things have improved for the airline in 2010-11, on paper. It must be noted that the losses are understated, since they are before interest and taxes and some amounts owed to other government entities may have been written off on non-commercial terms.

The average outlay per Samurdhi beneficiary per year in the past three years has been around LKR 6,000 (LKR 500 a month, a pittance). In contrast, the average loss per passenger in the same period has been more than LKR 2,184 when interest and taxes are included. Is it reasonable to spend 4-5 times what a Samurdhi beneficiary gets in a month to everyone who gets on a government-operated plane (rich and poor; citizen and non-citizen)?

People were not deprived of international travel prior to 2007 when Emirates managed the government airline. So it cannot be argued that government ownership is essential. In fact, the government airline is carrying a decreasing share of passengers and cargo. If anything, the government airline is less significant now than before 2008.

The facts are:

  • When the government held only a share in the government airline and allowed it to be professionally managed, the airline had positive equity and a large share of the passenger and cargo markets. It earned profits, made no demands for investment funds and contributed to government revenue.
  • Since the government started running the airline unprofessionally, it has reached a negative equity of LKR 15,600 million. Ithas a declining share of the passenger and cargo markets, has made losses in some years that were larger than total outlay on Samurdhi, and makes massive demands on government for capital. It makes no contribution to government revenue.

The airline industry is competitive. There is no need for sector-specific regulation. Selling a majority or minority share of the government airline and ensuring professional management will serve the country better than the current arrangement.

The airport is an essential facility that requires regulation. It can be better managed, but even under the present poor management, it is performing far better than the airline. In 2011, its net profit ratio was 41 percent. The airport declared dividends of LKR 2.4 billion in 2011.

The airport helps pay for Samurdhi. The airline competes with Samurdhi for scarce government funds.

The public will be better served by a government focus on a well-managed airport or airports, rather than amateur operation of a government airline.

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.