Comment
A flawed process
The recent Supreme Court decision on the Sri Lanka Insurance
Corporation (SLIC) privatization has highlighted why privatization was a
flawed process in this country. Privatizations reeked of corruption,
with those in power and big business enterprises engaged in underhand
deals to divest State enterprises for a song.
Privatization was once thought of as a panacea for all economic ills,
though even advanced economies have now shunned this theory in the light
of the global economic recession. Sri Lanka too was caught in the
whirlwind of privatization that swept the world a couple of decades ago.
This, of course, became a hotbed of corruption in this country.
The basic notion behind privatization is that the private sector,
being the engine of growth, is best suited to run business enterprises
and that the State should not be involved in business. Governments were
also pleased that funds from the sale of State enterprises also flowed
into State coffers. This temporarily eased cash flow problems faced by
Governments.
Privatization was one of the first by-products of economic
liberalization, which Sri Lanka pioneered in 1977. Economic
liberalization sounded the death knell for many local services and
industries which could not compete with cheap imports. Among them were
enterprises run by the Government. These became prime candidates for
privatization.
Privatization was considered as more or less a policy of the State,
until President Mahinda Rajapaksa assumed office in November 2005. The
dangers inherent in the process of privatization became apparent when
some Governments privatized State sector monopolies such as the LP gas
industry.
In the absence of any competition, the newly privatized entity could
dictate terms and prices as they wished, thereby adversely affecting the
consumer.
It was several years later that another company entered the LP Gas
business, alleviating the consumers’ burden to some extent.
A large number of State enterprises was privatized during 1977-2004.
Most of them were sold at very low prices, without a transparent
procedure.
Accountability was not considered a relevant factor. In the end, a
number of profit-making Government-owned business undertakings were
privatized - in other words, sold to dubious individuals and companies.
Tender and other Government procedures were not usually followed and
corrupt officials manipulated the bidding processes, if any existed in
the first place. The economy or the people hardly gained any viable
results through these dubious transactions.
The Supreme Court has on several occasions ruled that some
privatisations were clearly illegal. The recent Water’s Edge and
Insurance cases are good examples. The parties who successfully
challenged these privatisations in Court say that at least 40 more cases
of privatisation are highly questionable and they aim to take legal
action.
The Supreme Court observed that the Government’s stated objective to
end the monopoly in the insurance industry to attract foreign
investments had been a total failure since the SLIC was transferred to a
consortium of companies controlled by one person. The SLIC privatisation
has been tainted with corruption from the beginning. The SLIC sale
lacked transparency and was full of irregularities. This, alas, is a
factor common to all privatisations.
Insurance is a multi-billion rupee industry and the Government lost
billions of rupees annually as a result of the privatization. The same
goes for several other privatized ventures. Hopefully, this trend would
be reversed when these entities revert to Government control. The
Government now faces this considerable challenge.
The Government led by President Rajapaksa stressed that it would not
resort to privatization to generate funds for the Treasury, in spite of
the challenges faced by the economy. It disbanded some State agencies
set up specifically for the purpose of privatisation. This was a bold
and commendable move.
Infusing private sector capital is not the answer to managing public
enterprises profitably. However, there certainly are certain
shortcomings and attitudes in the public sector that lead to
inefficiency. If these can be rectified, the public sector can pose a
serious challenge to the dominance of the private sector.
One example is the Sri Lanka Transport Board, which suffered huge
losses under the so-called peoplisation phase, but many depots are now
making profits following re-nationalisation. Thus State enterprises can
be profitable if the employees have the will. In this light, the
Strategic Enterprises Management Agency has identified several key State
ventures which need more dynamism.
There should be certain checks and balances in the economy to protect
the public. The Government needs to intervene when the public is fleeced
by the private sector. Regulation is essential in this regard.
Privatisation has for the most part failed to deliver the goods and it
is now up to regulatory authorities to take remedial action. |