Govt: Stay out of business

by FS

(June 20, Colombo, Sri Lanka Guardian) The government move to buy back a 51 % stake owned by Shell Int. in the local Shell Gas Co will no doubt be viewed with dismay by economists, planners and those who strongly believe the state should stay out of business.

What is the rationale in these purchases? The same argument applies in the buy-back of the stake held by Emirates in SriLankan Airlines. Are we going back to the era of nationalisation? Most readers would laugh at this suggestion, knowing very well this won’t happen. Nevertheless the way the government is going about on privatisation and making pronouncements like for example Media Minister Keheliya Rambukwella’s comment at Thursday’s news conference where he said (in announcing the plan to buy back Shell shares) that it was done in line with the Mahinda Chinthana policy of moving away from privatising state enterprises, makes one wonder.

Apart from the government’s proven inability to efficiently compete with the private sector in business, the cost of paying for these stakes at both Shell and SriLankan Airlines is enormous and money that is unaffordable.

Even if the Mahinda Chinthana policy is not to privatise state enterprises; fine, keep it that way but why buy back enterprises that are losing? It would further lose money in state hands. SriLankan Airlines is a good example having to carry the financial burden of Mihin Air, which would have never been permitted if Emirates was given full control management control without interference.

Does the government or governments have a proven record in running state enterprises efficiently and without losses, or even at break-even point?

Look at the Ceylon Electricity Board (CEB), Transport, Ceylon Petroleum Corporation (CPC) and Water sectors where huge losses or debts are accumulating. Much of it is due to state bodies not settling their bills. Then what happens? The additional cost is passed onto the consumer.

All over the world, including the tiny Maldives Island, administrations are moving away from business and bringing in private sector expertise while having full or part control of state bodies. This is how public-private partnerships must work and in the case of Shell, this is how the government must go about in business: hand over the management to a private party which has the expertise, efficiencies and marketing capability.

Most of the inefficiencies in the state sector is borne by the people through taxes. The more the inefficiency, the more the taxes. Then when state spending rises, the government resorts to costly commercial borrowings – as we have seen in the past few years – which again means taxing the people to repay these costly loans.Running state companies would mean subsidizing these monolithic institutions with a huge workforce many of whom would be political recruits. That would probably happen.

Why on earth the government has to pump in billions of rupees to buy-back these instititions, beats one’s imagination. Is it a good avenue of providing jobs to political hangers-on?

Gas is a very complicated business and comes under price control. The world market prices have been fluctuating so much that companies like Shell, which has exited from the gas business across Asia and some other parts, have found it difficult to operate in countries like Sri Lanka where pricing policies are based on the consumer’s ability to pay. Often the cost of gas is far too exhorbitant to the consumer and the government has been holding onto the price to make it affordable. But that’s not helping the companies which have to make a profit, not break-even or lose money.

The government is just one of many companies that have expressed interest in the Shell stake, and negotiations are yet to begin between the state and Shell. However the government has a 49% stake and would have much bigger say in the final, negotiated price than the leverage Shell would have with other interested parties.

Subsidies, which we may soon seen in the gas business too, have been the bane of developing countries and the cause of growing debt. Take our fertilizer subsidy for paddy for instance; the farmer gets fertilizer at Rs 350 per bag when the actual cost to the state is Rs 1,500-2,000. Thus instead of finding an alternative and viable crop that farmers will be happy, contended and won’t disrupt their laid-back lifestyle, the state continues to carry this huge burden while taxing the people. But governments don’t have the courage to touch this issue because farmers are an important voter constituency.

Once again we urge the government to stay away from business and if it still persists with paying billions to fully own Shell Gas, then at least bring in private sector management to run it as our poll today clearly shows.