Selling the Family Silver
Photo courtesy of News In Asia
“They still ask, why are you selling profit-making enterprises, look at the SLT it’s making profits…ask the Secretary of the Treasury…what profits are made and how much more money we are to pump into the future…We have to decide whether we want to strengthen the people or whether we want to take public money and strengthen the Insurance Corporation…My priority is to look at the people and not these companies and buildings…we are selling it so that we can put this money into the foreign exchange reserve and strengthen the rupee…I will tell you one thing. If I can sell more and put 7 billion back, I will do it.” President Wickremesinghe, post-budget forum (November 2022)
President Ranil Wickremesinghe has often been accused of neo-liberal tendencies. The term is used as a pejorative; this statement and many before it justify the label and reveals his ideological compass. It is why he remains so popular in some circles and yet so reviled in others.
The president’s proposition is to sell even the profit making State Owned Enterprises (SOEs) to settle debt, noting the experiences of Sri Lanka Telecom (SLT) and Sri Lanka Insurance Corporation. Yet privatizing SOEs in a strategic, constructive manner is not as easy as we are being led to believe. Private sector efficiencies alone will not provide sufficient return on investments. This is one reason why there is not a long and excited queue of potential buyers for Sri Lankan Airlines. At the very least, Sri Lanka will need to bundle its profit making entities along with loss making entities in order to provide better value and extract higher prices. Any sale of national assets, “companies and buildings” as the president puts it, must be assessed against the potential sale price, long term prospects of the asset, the industry it operates in and the importance of the industry to national objectives.
This should especially be the case considering President Wickremesinghe’s most recent stint in power as prime minister under the yahapalanaya government, included the controversial long term lease of the Magampura Port in Hambantota to a Chinese entity.
The Magampura fiasco
The Rajapaksa government spent somewhere upwards of $1.5 billion to construct the port, cashflows from which were below expectations with Sri Lanka approaching a liquidity crisis due to upcoming debt obligations. The result was the 99 year lease of 70% of the port to the China Merchants Port Holdings Company for around $1.2 billion by the yahapalanaya government. A Hindustan Times article by Shishir Gupta from June last year noted that following the lease “There was no change to the country’s debt obligations for this project” and that “Sri Lanka continues to bear the debt for the failed port”. At the time, the yahapalanaya government was proud of having strengthened foreign exchange reserves. At present, reserves are virtually non-existent and a few months ago, the Hambantota Port was the scene of a geopolitical standoff concerning a Chinese scientific research vessel. The Magampura fiasco is reason enough for Sri Lankans to view the president’s comments on SOE privatization with suspicion.
The budget speech and accompanying comments in the context of his recent history in government paint an almost cartoonish neo-liberal caricature of the president and his policies. “In the 1970s and 1980s he was a neo-liberal like his uncle Junius Richard Jayewardene, but he has also adopted some pragmatic measures” said economist Umesh Moramudali in an Al Jazeera report from July 2022.
Writing in Jacobin in January 2019 describing the protest movement in support of the Wickremesinghe premiership in the aftermath of the 2018 constitutional coup, Kanishka Goonewardena stated that “Its ideologues would have done better to note that without addressing the pernicious Sri Lankan fusion of feudalism in politics and neoliberalism in economics, the ‘good governance’ project was from the start as good as dead.”
Leaving aside any lingering arguments about neo-liberalism’s successes and failures, let’s first state what standard neo-liberal policies and principles are. They include but are not limited to: liberalization of an economy through deregulation, privatization and free trade, welcoming globalization and increasing the role of private enterprise in commercial operations. Neo-liberalism also encourages reductions in government spending to the point of generating austerity. Author and activist Naomi Klein described three broad aspects of neoliberalism as “privatization of the public sphere, deregulation of the corporate sector, and the lowering of income and corporate taxes, paid for with cuts to public spending“.
On paper these principles of neo-liberalism seem to appeal almost instantly as policy prescriptions to Sri Lanka’s economic crisis. The economy does require liberalizing; the bureaucracy is certainly a hindrance to development; the state imposes all manner of trade tariffs; and government spending has become laissez-faire while the private sector is essentially subsidizing the state. Yet, can neo-liberal doctrines salvage Sri Lanka’s economy and set a new, more successful course?
Consider the policy prescriptions – deregulation helps private businesses operate with more freedom but also engenders risk taking behavior and environmental degradation. Malaka Rodrigo, reporting in an Indian publication in July 2022, noted that one of the first moves made by President Gotabaya Rajapaksa’s business friendly, pro-growth administration was to issue an order to revoke the requirement of a permit for the transportation of sand and ignoring encroachment and clearing of forests to facilitate villagers and loyalists. Villagers also used the president’s public relations program Dialog with the Village to bypass environmental regulations, said Hemantha Withanage of the Centre for Environmental Justice. Already we have seen encroachment of an elephant corridor near Udawalawe National Park, a road project built in a sensitive ecosystem within Sinharaja and the transfer of non-protected forest administration to local authorities for agriculture and development including biodiversity rich habitats and sanctuaries.
An efficiency/equity trade off
Take privatization. While many believe that privatizing SOEs is the simplest, most straightforward route to solving the crisis, the results of privatization in developing or transition countries has been mixed and the processes, complex.
A 2018 research paper published by Saul Estrin studied the various literature from the previous 40 years of privatizations in developed and developing nations. This research explicitly notes that some privatization failures in the 1980s and 1990s meant that developing countries needed more emphasis in policy making to create “the preconditions for successful privatization…in place of a simple pro-privatization bias characteristic of the Washington consensus, it is now proposed that governments should first provide a better regulatory and institutional framework, including a well-functioning capital market and the protection of consumer and employee rights. In other words, context matters: ownership reforms should be tailor-made for the national economic circumstances, with strategies for privatization being adopted to local conditions.”
Estrin suggested that in South Asia, privatizations have been rare despite widespread inefficiencies in SOEs. Sri Lanka is not an anomaly in our immediate region. Research on the Indian experience of privatization by Nandini Gupta revealed the deep contradictions that a policy of privatization can create. In India, there were historical impediments to privatization as much of India’s industrial base was established with state intervention in the post-colonial period. “Particular sectors had been reserved exclusively for SOEs, such as the infrastructure sector…steel, petroleum, and heavy machinery…the government nationalized many loss-making private companies; more than half of the firms owned by the Indian federal government were loss-making in the 1990s.”
As is the case in Sri Lanka today, India in 1991 was undergoing a severe balance of payments crisis which forced the government’s hand, necessitating reforms including the industrial policy of 1991, which sought to encourage private enterprise. India embarked on divestiture through partial privatizations and strategic sales. The Indian state only divested minority stakes and retained management control.
Estrin is clear “that a move from state to private ownership alone does not automatically yield economic gains. Rather, a number of factors have been found to influence the success of privatization”.
These factors include the selection of which industries to privatize, which SOEs to retain, which loss making SOEs to bundle together providing better value for the state, the regulatory framework, and institutional and political environment. Further, how do the profiles of private sector ownership affect the workforce and wider stakeholders and how will it be perceived by the citizenry? Is a program of privatization creating monopolies? Research from William Megginson noted that in countries which have privatized SOEs through asset sales, the process has frequently been non-transparent and plagued by insider dealing and corruption. Thus, the Russian loans for shares programs enabled well connected financiers to obtain controlling stakes in the country’s most valuable firms for a price well below their true value.
Crucially, how will foreign ownership of certain SOEs impact Sri Lanka’s domestic and foreign policy? In this context, consider the Magampura fiasco.
When the president states that he would sell as many SOEs as it would take to raise $7 billion (although total government debt is around $50 billion), will his government provide the pubic with an assessment of its impact on employment and wages? Estrin noted that “Privatization can also affect the distribution of income…As public enterprises tend to be overstaffed prior to privatization, private ownership can lead to… disproportionate redundancies for specific categories of worker (low-skilled, for instance).” The study by Chong and Lopez-de-Silanes based on a survey of 308 privatized firms covering 84 countries over the period 1982 to 2000 showed that employment was reduced in 78% post-privatization, likely worsening income distribution.” Further, privatization without competition has been shown to lead to an increase in prices of services and “private owners may decrease their engagement in specific, low-return market segments, which may disproportionately affect the poor.”
Extractive political elites
Estrin’s concluding comments: “Privatization programs are especially open to manipulation by extractive political institutions and elites in fragmented political environments…Privatization involves the transfer of productive assets from the state to private hands. Such transfers are, by their very nature, politically sensitive and subject to potential corruption and abuse.”
Other factors that should give cause for skepticism of any privatization program is the quality of the legal system and corporate governance, the depth and liquidity of the capital markets, barriers to domestic entry, barriers to competition and the independence of regulatory institutions. Successful privatization requires competent government with low levels of corruption.
Incentives not ideology
When Sri Lankans think of successful nations with fast growing and stable economies, there are some obvious candidates: Singapore, India, Vietnam, South Korea and Taiwan, all success stories of the Asian Century, each rapidly growing their economies, albeit with imperfections, some more pronounced than others. Sri Lanka should seek to emulate the governmental and structural features of such nations; simply including the words “export-oriented industrialization” in your speech will not suffice. The Sri Lankan political class is yet to fully grasp the fact that the development of these countries had significantly more to do with state intervention and organization than with any elusive invisible hand or even with maximizing their own competitive advantage.
The government of Singapore plays the role of an intrusive regulator in every aspect of the economy and society, India’s industrialization was driven by their State, Vietnam is a one party socialist republic and state involvement in the Taiwan miracle is well documented. In a recent piece in the Island Uditha Devapriya puts the issue succinctly, commenting on the budget speech, “President Ranil Wickremesinghe notes that we have borrowed from other countries and ‘got lazy day by day.’ The first point is correct… But the second point misses the first: the issue isn’t that we have got lazy, but that we have never shifted from commodity exports to manufacturing.”
This is not a question of expertise, capital or labour; it is a lack of incentives and this is the fine balancing act that policy makers must appreciate, the need to become part of the global supply chain whilst incentivizing industry in a manner that does not encourage rent seeking and instead demands innovation.
If this all sounds complicated, that’s because it is. It is also why President Wickremesinghe seems eager, by his own admission, to sell the family silver because the alternative, real policy, requires much more time and political capital than the president has on his side.
The writer can be reached on [email protected]