Loss-making State Enterprises – 9 Highlights of their Opportunity Cost

The Pathfinder Foundation held an interesting discussion last Friday (27th) on Sri Lanka’s ‘Government Enterprises’ as they called it, and what needs to be done about them. I chaired the session, and delivered some concluding remarks. Let me recap some of those views here.

keep-calm-and-fly-mihin-lanka‘Government’ enterprises are called different things at different times – State-owned Enterprises (SOEs), public enterprises, government businesses, State-owned Business Enterprises (SOBEs), and once even called the “monsters” by a GoSL Minister. Much has been written about the need for their reform. A former Central Banker, W A Wijewardena, writes here that the losses in public enterprises are “a violation of public property”. The debate on reforming loss-making SOEs has often been highjacked by camps at two extremes – on one side, those that believe the state should not be in business in any way and subscribe to the liberal economic mantra of “privatise, privatise!”; on the other end, those that believe that the state must remain in certain enterprises, there is nothing wrong with it, and privatisation is an ugly idea with horrible consequences. The current regime subscribes to the latter view, and government policy documents explicitly state that privatisation is not an option. We can debate the merit and demerit of this policy stance, but the wider issue is that these ideological attachments sadly miss the fact that there is a whole spectrum of ideas between those extremes. Any government has what I like to call “a suite of options” in the SOE reform agenda. A good overview is provided in this IPS publication – ‘Understanding the Conditions for Change in State-Owned Enterprises‘. As for specific policy options, this study from 1997 articulates the idea of ‘performance contracting’ as an SOE reform strategy. Amidst all of these studies (and the latest one by Prof. Sirimal Abeyratne for Pathfinder – soon to be published I hear), Sri Lankan economists have failed to effectively and meaningfully communicate the opportunity costs of loss-making SOEs to the citizens of Sri Lanka. At the end of the day, it is public money, citizens’ tax contributions from their income and their spending, that give the state coffers the money to prop up loss-making enterprises, pay salaries and benefits to their executives and their staff.

Counting the Cost

In my concluding remarks, I attempted to go some way in bridging this gap by providing some numbers for the audience to chew on. Some numbers that, for the first time, aim to help people realise the opportunity cost of loss-making SOEs, to help people realise why SOE losses matter to them. I used the Ministry of Finance and Planning’s Annual Report, which must be commended for containing pretty comprehensive information. I looked at the SOE sector performance, as a whole, but also by sector (aviation SOEs, banking SOEs, etc), and as individual entities. I focussed particularly on 12 of the SOEs making the largest losses*. I then cross-tabulated these against some sectoral investment and welfare spending by the state (education, nutrition, energy, etc) to get a sense of the ‘opportunity cost’. I only relied on the information contained in the report, as I was simply looking for some back-of-the-envelope numbers that would help me convey my message. So, here’s 9 highlights that I found most startling.

  1. One-third of income tax collection in 2013 is wiped off by the aggregate losses of those 12 SOEs in that year[i]
  2. Around Rs. 26 out of every Rs. 100 that the government raised in VAT (Value-added Tax) from items you bought in 2013 is wiped out by the aggregate losses of those 12 SOEs in that year[ii]
  3. The losses of 12 SOEs is close to 25% of the budgets of 9 of Sri Lanka’s most vital socio-economic Ministries[iii]
  4. In 2013 the government spent an impressive Rs. 24.3 Bn in programmes to transform education towards the needs of a knowledge economy. The losses of the 12 SOEs could have funded a near three-fold increase in these programmes[iv]
  5. Without the aggregate losses of 12 of the loss-making SOEs, we could have build another coal power plant, without depending on any foreign loans[v]
  6. The projected losses of the 2 state-owned airlines in the next 3 years will be 10 times what Sri Lanka spends each year on education-related welfare like text books, uniforms and school meals[vi].
  7. SOEs in a range of sectors made profits in 2013, totaling Rs 76.4 Bn. But 83% of those profits were wiped out by the losses of just 5 SOEs[vii].
  8. The losses of Mihin Lanka (Pvt) Ltd is equivalent to almost 1/4th of our annual education budget[viii]
  9. The losses of Mihin Lanka (Pvt) Ltd. in 2013 is equal to the entire amount the government spent in that year on crucial welfare programmes like ‘thriposha’, ‘poshana malla’ and ‘fresh milk for pre-school children’. Mihin has just 3 aircraft, while these programmes serve nearly 1 million people[ix]

Yet, I must reiterate that these are just back of the envelope cross-tabs. The numbers are available to anyone interested in doing some simple number crunching and using them to advocate around the issue. Check the comprehensive MoFP Annual Reports.

Moving Beyond Dogma

Let me also share some of the other thoughts I brought out at the session…

I argued that we need to move beyond the emotional or ideological lenses through which we see this issue of SOE reform, and begin to look at it more rationally and pragmatically. Even countries in East Asia that very much followed a ‘developmental-state’ model of economic governance began to adopt a very pragmatic and rational approach to their SOEs. In Korea, for instance, the Ministry of Strategy and Finance would, every couple of years, look at each one of their SOEs and analytical assess which ones should be retained, which ones should be privatised, which ones should undergo restructuring/management change, and which ones are suitable for Private-Public Partnerships (PPPs). Countries like Korea understood early on that there are a spectrum of SOE reforms – a ‘suite of policy options’ as I mentioned earlier.

Nuanced View

I concluded with the caveat that all SOEs cannot be evaluated from the same viewpoint. SOEs in Sri Lanka are not a homogenous group. Some are loss-making, many are very much profit-making. Some profit-making ones do so purely because of a monopoly market position they enjoy, while others are profit-making because of their inherent efficiency and good management. Some loss-making SOEs have a large social welfare element of their operations – for instance, providing bus transport on unprofitable routes, but serving a social need; or transmitting electricity to interior households at high cost, but serving a social need of rural electrification, etc. Increasingly, it will be important to look at the SOEs from a more nuanced and pragmatic lens. But yet with absolute urgency. Sri Lanka no longer has the luxury of receiving endless concessionary donor funds, and at the same time, our tax revenues to GDP have fallen to worrying levels (11%). Being smarter about where state funds are spent, and wasted, is becoming more important than ever before.

 

Notes:

[i] Approximately 32.2% (Income tax collection in 2013 was Rs. 1,005,895; 12 SOEs losses = Rs. 66,135 Mn)

[ii] Approximately 26.4% (VAT collection in 2013 was Rs. 250,523 Mn; 12 SOEs losses = Rs. 66,135 Mn)

[iii] The recurrent plus capital spending budgets for the following 9 ministries in 2013 amounted to Rs 281,207 Mn – Ministry of Industry and Commerce, Ministry of Health, Ministry of Education, Ministry of Technology and Research, Ministry of Child Development and Women’s Welfare, Ministry of Youth Affairs and Skill Development, Ministry of Environment, Ministry of Higher Education, and Ministry of Economic Development.

[iv] Rs. 24,267 Mn was spent on these programmes between 2010-2013. 272.5% of the 12 SOEs aggregate losses

[v]The stated investment amount of Sampur Coal Power Plant = Rs. 62 bn; total loss of the 12 SOEs in 2013 = Rs. 66 bn)

[vi] The government spent Rs 8,641 Mn on school textbooks, school uniforms, school season tickets, and school nutrition and food programmes in 2013, while the projected losses of Sri Lankan and Mihin over the period 2014/15 to 2016/17 is Rs. 90,566 Mn.

[vii] The following SOEs were the top 5 loss-making entities in 2013: Sri Lanka Airlines, Ceylon Electricity Board, Ceylon Petroleum Corporation, Sri Lanka Transport Board, and Mihin Lanka (losses amounted to Rs. 63.7 Bn); while the total profits of the SOE sector amounted to Rs. 76.4 Bn)

[viii] 2013 central government allocation on education = Rs. 8,200 Mn; Mihin’s 2013 losses = Rs. 1,956 Mn)

[ix] Approx 107% (2013 government spending on these 3 programmes was Rs. 1,829)

*Sri Lanka Airlines, CEB, CPC, SLTB, Mihin, Agriculture and Agrarian Insurance Board, State Plantations, Ceylon Fisheries Corporation, SLBC, MILCO, Janatha Estates Development Board, Ceylon Fishery Harbour Corporation

Advertisements

5 thoughts on “Loss-making State Enterprises – 9 Highlights of their Opportunity Cost

  1. It would be interesting to tarck the net loss/gains of SOE’s in absolute terms and as a % of Govt spending over the last 10 or 15 years.

    The state should be involved where there are natural monopolies, such as utilities where switching costs are high (eg water or electricity) with complete transparency of operations. A system of healthcare modeled on Hong Kong’s would also be desirable (public/private). The state could also paly a useful role in education as a hands-off provider of funds to charities and trusts that could be allowed to run schools or universities.

  2. Very good. Except the comment on state bus/transport services

    State transport services in general are a burden on the non-state transport users and even those using the transport system all over the through extra losses, which are then financed by taxes on their food or payroll taxes.

    For example the New York metro makes losses despite being in arguably one of the the most richest metropolises perhaps the most richest metropolis in the hisotry of human kind.

    Where as in Bangkok – a middle income city – the skytrain makes profits and pay taxes, despite being entirely privtately financed including civil works in the first line – probably the only one in the world – and not being a burden on the people.

    There are two ways to wealth the ‘greedy capitalist’ way where true entrepreneurs find money and offers a good or service, at the risk of a free customer that is free to decline it with only advertising to push it.

    The other is the ‘political means to wealth’ where the compulsion and coercion of the state apparatus is used to extract money, taxes, monopolies by the ruling class and their privileged hangers on who run businesses protected by import taxes or legal monopolies.

    One key advantage of running state enterprises for the ruling class is to make money off procurement when they buy buses, trains or aircraft. The other is to reward their their backers and hangers-on with jobs.

  3. While I agree completely with your view, I think the problem of loss-making SOEs has consequences that transcend purely fiscal considerations. When an ordinary enterprise makes a loss, it is paid for by shareholders or creditors, both of which have a right to say “no”. When a SOE makes a loss, it simply receives a subsidy. That gives it an unfair advantage over the private sector, which, after all, is the thing that’s paying for the SOE’s subsidy in the first place. A recent example: the army’s Rs 50 lunch packets are clearly sold for way less than the cost of their contents (hence subsidized), but they are nevertheless enormously popular with an ever grateful public who do not realize that dozens, perhaps hundreds, of small shops providing the same service an a market environment have had to close down. SOEs are fine so long as they play on a level playing field. When the earliest SOEs were set up (in fact during World War II) the idea was they would produce goods that the private sector could not, e.g. because of high risk. The model became entrenched in Sri Lanka’s leftward swing during the 1950s when dozens of SOEs were established: paper, leather, silk, cement, glass, steel, building materials, timber… The net result was that the private sector never got off the ground and still cannot, because large companies (whether listed or private) continue to operate as if they are SOEs, dependent on government patronage and connections. Acemoglu & Robinson explain this phenomenon in their 2012 book “Why nations fail”.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s