ADB expects Cabinet to approve pricing mechanisms for fuel, electricity this year

• SOEs are estimated to account for some 17% of economic activity
• Publicly guaranteed debt, including SOE debt, is estimated at 4.2% of GDP 
• ADB says SOE reforms depend on ring-fencing reform process from change in political order

The government is likely to put its rubber stamp on cost-reflective pricing formulae for fuel and electricity within this year, as the burden of state-owned enterprise (SOE) debt has been weighing on the economy for too long.

According to the Asian Development Bank (ADB), the Cabinet is expected to approve a proposal to this effect before the end of this year. 
“Under the ongoing programme with the IMF, Statements of Corporate Intent signed for the five largest SOEs are expected to enhance oversight and financial discipline. 

An outcome of these statements is a requirement that fuel and electricity come under an automatic pricing mechanism, which the Cabinet is expected to approve in 2018,” the Sri Lanka chapter of ADB’s flagship annual publication, ‘Asian Development Outlook for 2018’, released last week, said.

Cost-reflective pricing formulae for fuel and electricity are long overdue as the continued losses at the two largest state utility providers have undermined the fiscal consolidation and diverted resources from productive developmental needs.

Both fuel and electricity are largely subsidized as the prices of these commodities are widely used as political tools during election times, to garner votes– a practice with massive economic costs.

The pricing formula for fuel was scheduled to be implemented in March this year under the three-year extended fund facility entered into with the International Monetary Fund (IMF). But the policymakers backed off from it after the ruling coalition suffered a humiliating defeat at the recently held local government polls. 

The SOEs are estimated to account for some 17 percent of economic activity in Sri Lanka and they have a dominant presence in sectors spanning provision of infrastructure services, banking and insurance, hotels, media, salt production, plantations and livestock.

“While finance SOEs are profitable, the sector loses money as a whole,” ADB said. 

The publicly guaranteed debt, including the SOE debt, is estimated at 4.2 percent of gross domestic product (GDP). Additional SOE financial obligations were estimated to equal 11.9 percent of GDP at end-2016.

“SOE demand for financing thus potentially crowds out credit to the private sector,” the Manila-based development lender observed.
The government is currently considering a proposal to set up a state-owned holding company along the lines of Singapore’s Temasek Holdings, to carry out SOE reforms. 

“Critical to its success would be an appropriate regulatory framework, a governance structure, accountability mechanisms, an adequate pool of technocrats and arm’s length distance from politics,” ADB stressed. 

The bank also said given the efficiency, fiscal and distributional implications of an underperforming SOE sector, continued SOE reform is essential beyond the life of the IMF programme.

“Meaningful and sustained SOE reform depends on building a political consensus and ring-fencing the reform process from change in the political order.” 

The development lender further said the ownership change is not a panacea for underperforming SOEs but what may matter more toward improving performance is to institutionalize incentives while strengthening accountability and governance. 

ADB provided four key elements in SOE reforms, which comprised of efficient state provision of public services that takes into account their cost, a competitive business environment, independent regulators and fully transparent SOE finances.