State-Owned Enterprise Reforms in Sri Lanka: The Way Forward

Abstract

The authors provide a comprehensive analysis of Sri Lanka’s extensive SOE sector. The sector has witnessed episodes of nationalization and privatization and has been subject to varied degrees of competition. Yet, despite the rich knowledge base resulting from years of reform experience, much more needs to be done. The chapter emphasizes the fact that a sustainable SOE reform process must go beyond technical solutions and must unpack and resolve the more controversial political elements to secure broad-based stakeholder buy-in. The authors examine SOE reforms through the lens of inclusive growth and look at the performance of public enterprises from three dimensions: efficiency, fiscal, and distributional. They maintain that four factors are critical to a sustainable SOE reform process: (1) efficient state provision of public goods and public service obligations, with the cost of these obligations being explicitly estimated and taken into consideration when evaluating the performance of public enterprises; (2) a competitive business environment with competitive pricing; (3) independent regulation; and (4) full transparency of SOE finances, including the various implicit subsidies and payments, combined with the functioning of public enterprises under a hard budget constraint. Given Sri Lanka’s political economy context, the authors suggest that management and accountability-oriented reforms and public–private partnerships may prove useful. In particular, for Sri Lanka, performance contracts and government holding company models have potential; indeed, Sri Lanka is currently in the process of establishing a government holding company, designed as a hybrid of Singapore’s Temasek and Malaysia’s Khazanah structures. In a broader context, Sri Lanka has an opportunity today to undertake meaningful reform of public enterprises. There are, as always, significant sociopolitical, institutional, and technocratic challenges. However, looking to international good practice and to Sri Lanka’s own experience with these reforms can contribute to sensible policy conversations. A crucial element in all of this is mobilizing public opinion by effective communication strategies that clearly indicate the reform objectives. What is required therefore is a political economy strategy with the capacity to address opposition to SOE reforms in a rational, transparent, and systematic manner. Dramatic reform is unlikely and expectations need to be managed, but incremental progress is certainly achievable.