What to do about incompetent state enterprises in Sri Lanka

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.