Finance Ministry Annual Report has indicated that the Ceylon Electricity Board (CEB) is estimated to incur losses amounting to Rs 124 billion between 2017 and 2019.
According to the report, it is estimated that the CEB will incur a loss of Rs 35 billion, Rs 41 billion and Rs 48 billion in 2017, 2018 and 2019, respectively. The report further states that with the expected severe drought condition, it is likely that the losses will exceed the estimated sum in 2017.
This is the tip of the iceberg, looking at the burden of losses of State Owned Business Enterprises (SOBEs). Losses were billions over the years and IMF too had instructed the government to introduce structural reforms to minimize the losses.
It is to overcome this issue the president in his manifesto had proposed the Tamasek economic model aiming at making state institutions efficient and effective. Tamasek was the economic model followed by Singapore in their journey of becoming an economically strong nation of the globalized world.
What is the Tamasek Economic model?
Throughout history, many economic models were proposed and followed by different nations. Some of them had succeeded while some of them failed. Most prominent economic models, socialist and capitalist models, were adopted by many countries. History has shown that the economic policy towards long-term development should be a mixed one where state interference merges with the free market model.
Tamasek Economic model has features of both social and open market economic models. In certain occasions economists refer this as a state capitalism as state goes beyond its traditional objectives. In this economic model the SOEs are monitored by an institute which ultimately accountable to the public.
In Singapore this company is called Temasek, which holds SOEs in Singapore, as a potential model. Accordingly, it was created in 1974, when it inherited 35 companies from the finance ministry. Its inaugural portfolio contained several of the firms, including its shipyard and its bird park. In the four decades since, Temasek’s portfolio has both multiplied (it is now worth S$215 billion, or $172 billion) and gone forth: only 30% of its holdings remain in Singapore itself.
In this model, SOEs are managed as a private company while state ownership is retained. Accordingly, the institution will be managed by professionals who should be accountable to the directors.
This economic model can be implemented in many ways. The economic model needs to be changed in line with the economic, social and legal context of Sri Lanka. Dr. Lalithsiri Gunaruwan, the former secretary to the Transport Ministry and economist, assured that no public servant would lose their jobs due to the implementation of this economic model.
However, with the implementation of the new economic model, no politician would be able to recruit his or her supporters in the electorate. The institutions would be free from political interference and as a result of that only professionals would head these SOEs.
Why we need Tamasek?
Sri Lanka’s SOEs had become white elephants during last few decades under several governments. Sadly, instead of contributing to the economic growth of the country, these SOEs had contributed in reducing the economic growth.
There are many arguments about the effectiveness of state interference. It is a question whether the desired outcomes were achieved as a result of state interference in economy.
State Own Enterprises (SOEs) and regulatory bodies have failed miserably. According to the Fourth Interim Report released by the Committee on Public Enterprises (COPE) the Ceylon Petroleum Corporation (CPC), Mihin Air and Ceylon Fisheries Corporation (CFC) accumulated losses amounting billions.
Why not privatize?
There are two ways to turn loss making SOEs into efficient institutions. One is privatizing such enterprises and the other is reforming these institutions while retaining the state ownership. The Tamsek model refers to the latter which could be implemented in different ways. In Singapore, SOEs were listed in the share market while majority of the shares were held by the government.
According to senior economist Dr. Gunaruwan, listing SOEs in the share market makes it imperative for the managements to run the institutions efficiently as the market value of shares would depend on the efficiency of the company.
On the other hand, the government has the option of privatizing SOEs which would turn them in to profit making and efficient institutions anyway as the sole objective of a private firm is profit maximization. For example, Sri Lanka Telecom (SLT) which is known as a loss making institute became a profit making entity after it was privatized. In the process of privatization, state too might own certain percentage of shares, but the majority of shares would be owned by the private sector.
However, the economic history has shown us that there can be serious consequences of privatization.
In any economic model state, intervention is needed and very crucial. When the private sector is pursuing their own interest of profit maximization the common objectives such as social welfare are likely to be ignored.
Not everyone in the society can make profit. Resources are distributed unequally; hence there are segments of the society which need the support of the state. SOEs are also another way of state intervention to the economy in order to ensure the social welfare. For example, public can travel by train at very low cost due to the Sri Lanka Railway (SLR). If these were to be privatized, the needs of certain segments of the society would be totally ignored as private institutions only focus on their bottom-line. Lack of regulation and the dearth of state intervention would result in no availability of certain goods and services.
However, the state should know its limits. SOEs as well as state departments are not properties of politicians or officials, but property of the public. Therefore, the decisions have to be made in the best interest of the organization, not in the interest of the subject minister or any other politicians.
Tamasek is not privatization
Although certain politicians claimed that Tamasek is an attempt to privatize SOEs, Tamasek by no means is a synonym for privatization. If privatization is the objective, Tamasek model is not needed. In Tamasek, state ownership would be retained, hence if the companies are listed and majority of the shares would be owned by the state. Yet, the state also has the option of not listing SOEs, but to monitor them under an institution run by a board of directors consisting of professionals. That way the directors would be accountable to the public and there will not be political intervention to such institutions.
Two economic giants in Asia, China and India, not only reformed but also have turned most of their SOEs into multinational corporations. Accordingly there are more than 200 SOEs which had gone beyond domestic markets and become multinational companies. Nearly 70 SOEs of China are amongst top multinational companies of the world.
Senior Economist, Prof. Sirimal Abeyratne pointed out that in 2011 it was reported that China’s State-owned Assets Supervision and Administrative Commission (SASAC), the Government agency charged with the responsibility of monitoring and controlling China’s State-Owned Enterprises, showed a total realized net profit of $ 133.56 billion in 2010, up by 42.8 % over that of 2009. The profit was noted to be the product of decades of experimentations triggered by economic reforms in China.
China which used to have a social economy too reformed its economic model based on Tamasek economic model and had enormous success. Sri Lanka too can take the same path carefully and turn these loss making institutions in to profitable ones.
It was the prominent neo liberal economist Milton Friedman who stressed that “if you put Federal government in power of Sahara there will be a shortage of sand”. Perhaps Friedman who is a strong critic of the ‘state’ might have exaggerated about the inefficiency of the state. May be not, yet the statement reflect a bitter truth of failure of many state institutions.
Many State Own Enterprises (SOEs) in many countries have however proven that Friedman is correct. The situation is similar in Sri Lanka. SOEs in Sri Lanka have failed miserably over the years and have become white elephants. Therefore it is apt to say that reforms are not an option, but a must.