Privatisation in Sri Lanka

The Sri Lankan experience of privatisation provides an interesting study where a relatively ambitious programme has been successfully implemented. By Arittha Wikramanayake.

introduction

Sri Lanka embarked on a programme of privatisation in the mid 80's, approximately a after it had officially moved away from its with socialist economic policies, and commined Itself m a path of liberallisation. The Sri Lankan experience with privatisation is varied and has had mixed results. Being one of the first countries in the region to engage in privatisation, the country had m fate various political, sod] and economic issues in implementing the process with little guidance m a roadmap. This article attempts to set cart some of the facets of the process.

A Brief History

In the mid 1950's, Sri Lanka (then Ceylon) embraced policies focused on direct government Involvement in economic development With the passage of the State Industrial Corporations Act of 1957 and the Government Business Undertakings (Acquisitions) Act of 1971, the Government laid the foundation for a high degree of Sure intervention,

based on economic ideals of self sufficiency and Import substitution. By 1977, through the systematic nationalisation of private enterprises, approximately 107 enterprises were brought under State control, amounting to 24% of the Gross; National Product (GNP), one third of the total investment and 40% of formal sector employmerit.

In 1977, Sri Lanka decided on a fundamental shift and adopted open market policies. Though the private sector was officially desinated as the "engine of growth" and various measures for liberalisation were immediately implemented, it was nearly a decade later with the setting up of the Presidential Commission mPrivatisation and the passage of the Government Owned Business Undertaking to Corporations Act and the Conversions of Public Corporations Into Public Companies Act of 1987 that the Government cornmenced a programme of privatisation.

The First Phase

The First phase of Privatisation in Sri Lanka Accured between the years 1989 and 1994, under the Government of the unted National Party (UNP) The Privatisation was conducted through a division of the Ministry of Finance known as the Commercialisation of Public Enterprises Division. Although several enterprises were privatised during this

phase, they were mostly ad boc and effected in a "closed" environment.

The second phase of Privatisation took place after 1994, under the Peoples Alliance that had highlighted the corruption associated with the previous privatisation programme as one of the main issues of the general election held that year. Consequently, upon being elected, the PA Government set up the Public Enterprises Reform the Commission (PERC) with die intention of effecting privatisations in a structured and transparent environment.

(The first phase of privatisation in Sri Lanka occurred between the years 1989 and 1994, under the Government of United National Party (UNP). The privatisation was conducted through a division of the Ministry of Finance known as the Commercialisation of Public Enterprises Division.)

In 1996 PERC was formally constitued as an independent statuory body under the public Reform Commission of Sri Lanka. Act (PERC Act) with extensive and ambitious functions and powers reflecting the expectation of the PA government's privatisation programme. The included the duty to advice the government on reform of public enterprises with a view to fostering and accelerating economic development; improving the efficiency and competitiveness of the economy, upgrading production and services with access m international markets on a competitive basis by the acquisition of rim technology and expertise; developing and broad basing the capital market and mobilising long term private savings mortivating the private sector; and augmenting the revenues of the government to enable it to better address its social agenda.

Criteria for Privatisation

The PERC was guided by several criteria in selecting enterprises for reform These were based on the enhancement of efficiency of government investments; strengthening market competition the development of the capital market by attracting long term private savings and foreign investment; broad-basing ownership of public enterprise and helping

the fiscal position of the government by mobilising resources for retirement of public debt and relieving pressure on the government's capital investment, especially in relation to large scale infrastructure investment.

Motivating Factors for Privatisation

The factors that motivated Privatisation in Sri Lanka are no diffterent to those that led most other developing countries to do so. These include, overcoming the burden of the inefficrency and non viability of State Owned Enterprises (SOEs) due to over staffing, outdated technologies, inept management, the inability of the state to

continue to subsidis such Enterprises, and the resultant failure of SOEs to fulfil the needs of its consumers. However, in Sri Lanka a further factor motivated the acceleration and the direction of the privatisation prograrmme the need to meet acute fiscal deficits resulting from the heavy costs of the ongoing separatist war through the sale of SOES.

(During the first phase of privatisation

the Government disposed of several enterprises

engaged in basic manufacturing services,

(textiles, foods and beverages, cement,)

and services (hotels and tourism

and financial services).

The Governments Attitude

One of die most striking features; in Sri Lanka privatisation experience is that although the privatisation process was initiated by the United National party which was committed m follow aggressive pro-market policies, the peoples Alliance, which succeeded it in government has hem even more aggressive in its pursuit of privatisation despite the leftist components wither the Alliance. Thus, differences between the mainstream parties on privatisation have largely been limited m the methods of implementation of the process, rather than the need for pirvateation per se. Consequently, government attitudes on privatisation have been aggressive. Apart from key enterprises that are

perceived as being ensemble for privatisation m the grounds of national security (e.g., the state run broadcasting Corporation political expediency (e.g., the state controlled press, Lake House) and exmeme political sensitivity (eg., the Petroleum Corporation) them is bi-partysan< agreement that privatisation should be the rule rather than the exception.

Selection of Enterprises for Reform

The selection of enterprises for privatisation has generally been based on a hands-off approach to economic activity and the ability of the government to dispose of SOEs within the government's valuation. Within this general ride, the government has also sought to give precedence to enterprises that urgently need to be hat urgently need to be modernised in order to fulfil its socio-economic objectives. For instence, the Gervernment was acutely aware that the state owned Sri Lanka Telecom (SLT) was woefully Allequipped to provide efficient communications network that was urgently required by the private sector Concerned that SLT routinely took several years to provide even a basic telephone connection and unable to provide SIT with additional capital to upgrade infrastructure, the government sought to remedy the situation by the privatisation of SLT to a large intenational operator. Similarly, in the case of the national airline, Air Lanka the government was therefore faced with the twin problems of declining tourist arrivals due to the ethnic conflict and the prospect of replacing the aging aircraft and was forced to seek a strategic partner to revive the fortunes of the enterprise.

Nevertheless, pragmatism has also ensured that some key enterprises are not privatised. Despite the fact that the state owned banks which dominate the financial sector in Sri Lanka are beset by inefficiency causing Immense distortions in the financial seam, they officiafly remain outside the lists of enterprises identified for privatisation due to the strengths of the teade unions.

Selection of Strategies

Another interesting feature of Sri Lankas privatisation programme has been its willingness to experiment with methods of privatisation depending on specific situations. During the first phase of privatisation the Government disposed of several enterprises engaged In basic manufacturing services, (textiles, foods and beverages, cement) and services (hotels and tourism and financial services). The privatisation of these enterprises did not require much political groundwork or restructuring and therefore such privatisation was effected through direct sales, tender procedures and open bidding on the Stock Exchange. However, in the letter phase, the governmerit undertook the privatisation of larger more complex entities such as the plantations, Air Lanka And SIT, which needed the government to address far more pellitically sensitive issues, requiring comprehensive planning and preparation prior to privatisation. The selection of strategies therefore were primarily based on the priorities of the government, including the profile of the potential investor,

specific operational needs of the enterprist acid, in most cases, the urgency for securing funding m meet the budgetary needs of the Treasury.

(one of the

primary factors

that motivated

privatisation in

Sri Lanka

has been the government's

acknowledgement of its

inability to subsidise

ventures that

are invariably

heavily over-staffed.)

Flexible Approach

these changing factors meant that the government had to be flexible acid to select from various options rather than being committed to a single approach. For instance, in the case of the plantations, the government initially sought to lease the estates for shod periods of five years to management companies. However, when it became clear that

short term leases were not viable for agricultutural properties, the government reformulated its Strategy by extending the lease periods to fifty years and disposing the shares of the management companies on the Stock Market. Similarly, when privatising large service providers, such as Sri Lanka Telecom and Air Lanka, the govrnment sought to attract large audit nationals by offering there total management control of such enterprises with a minoring, stake in the enterprise.

Earning Public Support

The selection of strategies has also been influenced by other considerations. During the first phase of privatisation, the government's priorities were to develop the capital market. The privatisation process was therefore used to contribute to the development and expansion of the capital market, effect some "distribution of wealth and to broadbase ownership" and create a "share owning democracy.." The development of the capital market brought in its wake considerable benefits to the privatisation pm~ since the substantial capital gains made by the public through such offrings resulted in creating good will for the government and mobilised large scale support for the privatisation programme amongst the public.

Privatisation and Employment

One of the primary faction that motivated privatisation in Sri Lanka has been the government's acknowledgement of its inability to subsidise ventures; that are invariably heavily over-staffed. State Owned enterprise (SOE) in Sri Lanka have traditionally provided governments with an easy avenue for dispensing political patronage. Apart from the short term benefits in the form of goodwill, such appointments haw also provided politicians with the ability to commend the use of the resources; of web institutions; during critical tims Employees of SOE's have therefore traditionally wielded a great through their trade unions.

trade Union Support

In these circumstances, one of the most important issues before any privatisation has been the need to coopt the trade unions to support the process of privatisation. Despite initial resistance, the government has generally been successful in doing successful through various devices. these include the projection of the process as peopleisation
and a means of distributing wealth, during the first phase of privatisation, the distribution of (usually) 10% of the share capital of the company to employees at no cost, and obtaining undertakings from the purchaser of such enterprises that there would be no retrenchment of employees or diminution of their terms of service after privatisation. These measures have largely succeeded in alleviating the concerns of employees of such enterprises and co-opted them into the governments;government's programme of privatisation.
Cost and Benefits of Privatisation

It could generally be said that the Privatisation that has taken place to date in Sri Lanka has resulted in mixed result Them is little dispute that allmost all the SOE's that have been privatised to date had been a major drain on state resource& The need for subsidisation of

these enterprises and the economic and social impact of their inability to provide efficient services has been a serious obstacle to the ttainment of the Government's overall socio-economic programmes. After privatisation, these enterprise have generally succeeded in improving the quality of services addressing concerns that led to their

privatisation. The privatisation programme has also had a beneficial Impact m the development of the capital market mobilising savings and luring a large number of domestic and foreing investors to participate in the Capital Market in Sri Lanka.
Political and Social Costs However, the Privatisation of enterprises has also readied in cosiderable political and social costs One of the primary political costs has been the wide spread allegation of corruption nonaccountability in implementing privatisations. Despite the fact that the manifesto of the Peoples Alliance alleged that the Privatisation programme of the previous regime had been tainted by corruption nepotism fraud and political patronage", the performance of PERC which was set up to prevent such abuses has also not been above reproach, in some instances. These have also been instances of privatisations where enterprises have been sold far below the valuations and asset stripping" taken place thereafter. Although the government enacted the Rehabilitation of Public Enterprices Act in 1996 to empower it to intervene in the case of privatised enterprises; that had failed, resultingin nan-employment, retrenchment and non payment of wages and statutory dues of workers of such falied companies, several such instances still remain with no resolution. Some vital cases of privatisation, during recent tims have been effected giving the privatised enterprise monopoly status for a predetermined number of years. Prime examples of such monopolies include the domestic gas industry and Sri Lanka Telecom(SLT) Consequently, there has been a serious public outcry against rising prices and the shutting out of copetitors for such services. Although thew monopolies were granted on the basis that an Independent regulator would regulate their conduct, the "Independent regulators have fail to perform their role adqately causing the government and the public to bear high costs. Conclusion The Sri Lankan experience with privatisation provides an interesting case study where a relatively ambitious privatisation programme has been successfully implemented despite rnany domestic and international obstacles. The limited size of As capital markets, the low savings rate, and the reluctance of foreign investors to make longterm investments because of political and mill" conflict has foxed the government to continually make pragmatic adjustments to balance the interests of various stakeholders and proceed with the process. However, the greater challenges are yet to come, when inevitably, the programme will have to focus on far more sensitive arese such as the Facial sector. Nevertheless, there is no reason why these cannot be faced if lessons learned from past transactionsam well heeded. (The Sri Lankan experience with privatisation provides an interesting case study where a relatively ambitious privatisation programme has been successfully implemented despite many domestic and international obstacles.) Mr Aritha Wikramanayake is the Senior Partner of a leading law firm in Sril Lanka, and the fomer Director-General of the Securities & exchange Cmmission of Sri Lanka. Liberal Time*. 2/00. 27
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