The myth of privatisation

Privatisation was often thought of as a panacea for all economic ills. Sri Lanka too was caught up in the whirlwind of privatisation that swept the world a couple of decades ago. The basic premise behind privatisation was that the State should not be involved in business. Funds from the sale of State enterprises also flowed into State coffers, temporarily easing cash flow problems faced by Governments.

Sri Lanka was one of the first countries in Asia to liberalise its economy, in 1977. Economic liberalization sounded the death knell for many local services and industries which could not compete with cheap imports.

Privatisation too was a main component of the economic liberalization agenda.

All regimes that followed, adopted privatisation as a policy of the State, until President Mahinda Rajapaksa assumed duties in November 2005. President Rajapaksa stressed that the Government would not resort to privatization to generate funds for the Treasury and disbanded some State agencies set up specifically for the purpose of privatisation. This was a bold and commendable move.

A considerable number of State enterprises were privatized during 1977-2004.

One Government even coined a term - peoplisation - to hide the true nature of the transaction. In the end, a number of profit-making Government-owned business undertakings were privatized - i.e. sold to dubious individuals and companies, virtually for a song. A hallmark of these transactions was the complete lack of transparency and accountability. Tender and other Government procedures were hardly followed and influential officials manipulated the bidding processes, if any existed in the first place.

Privatisation was thus a massive loss to the country and to the people. The funds that should rightly have belonged to the people went to private entities here and abroad. This led to a drain in foreign exchange as well.

Worse, some of the privatized enterprises were monopolies and the consumers had to endure whatever prices they charged for their products and services. This led to several lawsuits being filed against these privatisations. The Supreme Court has ruled that several privatisations were clearly illegal.

The recent Water's Edge case is a good example. In the latest development, the Supreme Court in a landmark judgment has annulled the multi-billion rupee privatisation of the State-owned insurance giant - the Sri Lanka Insurance Corporation (SLIC) in 2003. The Court ordered to divest forthwith 90 percent shares of the SLIC with the Treasury and restoring the ownership of all its shares to the Government.

As the Court observed, 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. Insurance is a multi-billion rupee industry and the Government lost billions of rupees annually as a result of the privatization.

The SLIC privatisation has been tainted with corruption from the beginning.

The SLIC sale lacked transparency and contained irregularities. The Steering Committee had been illegally appointed without the approval of the Cabinet. This, unfortunately is a story that has been told many times over in the sordid privatisation deals.

Privatisation need not be the only answer to managing public enterprises. It is true that certain ingrained attitudes of public sector employees could lead to inefficiency. But such attitudes can be changed through a process of reform. The Sri Lanka Transport Board suffered huge losses under the so-called peoplisation phase, but many depots are now making profits following its re-nationalisation. It is the same staff who had transformed these depots. It is thus evident that State enterprises can be profitable if the employees have the will. The Strategic Enterprises Management Agency is rendering a yeoman service in this direction, having identified several key State ventures which need more dynamism.

The worldwide economic crisis has taught the developed world a lesson - that private capital does not always work. These economies, built on a seemingly strong foundation of private enterprise, collapsed almost overnight. Some Governments even went to the extent of declaring their countries 'bankrupt'.

Ironically, these countries which championed unbridled capitalism had to do a volte face and effectively nationalise many private banks and other businesses, though they do not dare to use the term. Locally, we have seen the collapse of finance companies which had a large customer base.

The lesson here is that an unregulated private sector is not healthy at all for the economy. Governments and regulatory authorities should keep a close eye on the private sector. The 'engine of growth' should not be allowed to run as it pleases, even in a so-called open economy. It is best to keep a watchful eye on the private sector, in order to safeguard the interests of the economy as well as those of the public.