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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.

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