Cost of SOEs inefficiency cannot pass on to the consumers – Finance Minister

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We cannot pass on the cost of inefficiency on to the consumer or the general public and therefore it is essential that SOEs eliminate management inefficiencies prior to the implementation of fully cost reflective pricing Minister of Finance and Media Mangala Samaraweera said this morning.

Addressing the Conference for the Heads of the State Owned Enterprises (SOEs) at the Hilton Colombo held today (5th July) the Minister added that as the key players in our national ventures, you may have to relook at your operations seriously to achieve reasonable management improvements in the interest of our fellow citizens.

The text of the Ministers speech is as follows:

Let me at the outset thank the Department of Public Enterprises for organizing this timely conference for the Heads of State Owned Enterprises (SOE’s) to equip them with the operational aspects on certain financial and administrative instruments.

Many of you present here are managing vital economic activities in Sri Lanka such as public transport, public utilities and services. Today I was told there are heads of 55 important SOEs present here from strategically important public ventures. I need to emphasize that your conduct of business plays an essential role in the daily life of our fellow citizens, as well as the productive performance of our national economy.

Last year, in the Vision 2025 document, we outlined our government’s policy on the management of public enterprises that proposes to eliminate unproductive expenditure. In V 2025, we made a pledge to restructure SOEs to enable them to operate as commercially viable ventures with accountability.

During 2017, your 55 public ventures alone have recorded a total turnover of nearly Rs. 1800 billion which was almost 13.22 percent of the GDP. Out of the 55 SOBs 39 recorded a net profit amounted to Rs. 136 billion while 16 made net losses amounted to Rs. 87 billion in 2017. The total asset base of SOBs grew by 13.6 percent in 2017 over 2016 and it accounted for almost 56.8 percent of the GDP. However, despite their strategic importance, SOEs have not achieved full potential, which is reflected by its low Return Over Assets (ROA) ratio at 0.64 percent. The reasons for such underperformance ranges from lack of good governance practices, including lack of a clear accountability mechanism, policy and legal framework, to a weak supervisory role. I encourage you to address those difficult, but serious issues at your deliberations today.

Moreover, in recent years the performance of some SOEs has been a source of concern for the fiscal balance. In 2017, total government revenue declined from 14.2 percent to 13.8 percent, influenced by a drop of revenue from SOEs reaching a 50 percent decline in dividends and levies as compared to 2016. In 2017, four of the main loss making SOEs i.e. Ceylon Electricity Board, Sri Lankan Airlines, Sathosa and Agriculture and Agrarian Insurance Board combined in losses amounting to Rs. 84 billion. I may say this as a dismal performance that creates public outcry over the mismanagement of our national resources.

Given the importance of the SOE’s, the government’s strategy is to encourage and facilitate you to be self-sufficient through improved corporate practices, management reforms, innovative financing, strong and prudent financial management, exposure to competitiveness and international best-practices and effective human resource management, while enhancing public accountability. It is pertinent that 2018 Budget allocated funds to operationalize the National Agency for Public Private Partnership (NAPPP), which will be the single facilitation point for all stakeholders in designing and implementing PPPs. You must now make efforts to closely work with the NAPPP in compliance with our PPP initiatives to gain the strength of the private sector to remain viable business operations.

The Department of Public Enterprises (PED) has adopted a new approach with the introduction of the Statements of Corporate Intents (SCIs) to support your entities. The SCI is a statement that contains key performance indicators targeting the core activities of the entity which will be reflected in improved financial and non-financial performance. During 2017, five key SOEs became party to the SCI, having signed tripartite agreements. I encourage all of you to follow suit without any delay.

We cannot pass on the cost of inefficiency on to the consumer or the general public and therefore it is essential that SOEs eliminate management inefficiencies prior to the implementation of fully cost reflective pricing. As the key players in our national ventures, you may have to relook at your operations seriously to achieve reasonable management improvements in the interest of our fellow citizens.

It needs to be noted that the role of the Treasury in overseeing the performance of these SOEs is mostly linked to the incorporation of the entity itself. As such, when monitoring the SOEs that are incorporated under the Companies Act, the Treasury’s supervisory role is governed primarily by the responsibilities of that of a shareholder towards an entity as governed by the Articles of Association. With regard to those entities incorporated or established under an Act of Parliament, the Treasury will enact the provisions of the Finance Act no 38 of 1971. In both instances the applicability of the guidelines issued is dependent upon mainly the complexity of the operations, the market conditions and the competencies required ensuring smooth operations.

Therefore, when taking decisions the Boards of Management or Directors and the Management must ensure that while being governed by the guidelines and the circulars issued by the Treasury and other applicable entities, the decisions must fundamentally be within a proper legal and regulatory framework. The objectives of the entity should be achieved effectively and efficiently having utilized the available resources. It is important that the Boards and the senior management exhibit due diligence given that the resources under their custody are non-other than public property.

is noted that you are vested with a responsibility to ensure that the entities operate as commercially viable having exercised best business practices. This demands the appointment of personnel who are properly qualified and have the capacity to guide your entities to achieve their objectives. In this context the Treasury envisages conducting awareness programmes for the members of Boards and the senior management on the best practices that must be adopted in guiding the operations of these entities.

I expect to see a marked improvement in your performance in the ensuing year to bring our economy to greater heights. Thank you.

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