Many reasons for and against privatization of SOEs

The Parliamentary Sectorial Oversight Committee on National Security last week recommended against the privatization of Sri Lanka Telecom, citing national security grounds. The government has claimed the report ‘lacks logical or scientific data.”
The State owns the majority stake (49%) in Sri Lanka Telecom, while Malaysia’s Global Telecommunications Holdings hold 44%. SLT was a textbook case of the glaring incompetence of state monopolies until its 1997 divesture of 35.2% shares to Japan’s Nippon Telegraph and Telephone Corp (NTT). So was its post-privatization a success in breaking down the state monopolies. In 2008, NTT sold its stake to the Malaysian company.
There are many reasons for and against the privatization of the SLT, some plausible, some not, and many in between. But national security is the least of them in this particular case, though the usual culprits in the Parliamentary Sectorial Oversight Committee saw it as the most persuasive. That may suggest symptoms of a bigger ailment, a closeted and insular worldview and a serious intellectual deficit, which is not unique in Sri Lanka’s political class. The composition of the sectorial committee cannot be any better than the composition of Parliament. However, those like Parliamentarian Field Marshal Sarath Fonseka, who has since resigned and Rear Admiral Sarath Weerasekara were senior military officers who bring a security perspective. Perhaps, their subjective bias is clouding a more nuanced view. Many others bring nothing, and letting a similar cohort decide the key national priorities, in the pretence  of parliamentary oversight, is tantamount to bus conductors deciding the national transport policy. 
Consider the report’s logic: “Further privatization would expose the country’s critical communication infrastructure/sensitive information to private entities whose profit-oriented interests can compromise national security. Hence, privatization of Telecom is not recommended, “Sarath Weerasekara. Consider the international experience: Britain’s largest telecom provider is Vodafone, of which the majority stake is owned by the UAE Investment Fund (14%), followed by BlackRock, a US Investment fund. Countries may deny investment in critical infrastructure by entities deemed associated with foreign adversaries, such as the US ban on State-owned Chinese telecom providers in the country. However, a wholesale ban on foreign entities, citing exaggerated national security concerns, is simply bunkum. 

Imaginary fears and real ones
The danger is that this would not end here. The national security boogeyman could be summoned anywhere, anytime, against the restructuring of the Sri Lanka Electricity Board, Petroleum Corporation, Gas, Insurance, linking the power grid with India, or anything you name. There again are logical national security implications should you allow your current or potential future adversaries to take a decisive stake in your energy security, as Germany found vis a vis Russia or Britain, belatedly sought to cut the stake of the State-owned Chinese power group, CGN in its nuclear power plants. There again, the wholesale opposition to foreign involvement is nonsense. (A French firm replaced the Chinese in Britain).
Sri Lanka’s relative power potentials differ from Britain, a major power with substantial global ambitions, NATO treaty commitments and the desire to maintain the status quo in the global power hierarchy. Smaller nations like Sri Lanka better provide security to themselves by interlocking their economic and national security interests with other major players, coaxing them in and providing a level playing field for all, and acquiring some global security commitments. Closeted minds who paraded non-Alignment, by extension, disassociation with the West could not understand this empirical reality. However, this premise could be attributed a good deal to the winners and losers of the last 70 years in the international political economy. 

History rhymes or repeats
The second observation by the oversight committee is perfectly right. It noted that ‘anyone or organization who had been blacklisted, helped terrorists, extremists in any form should not be allowed to buy any share and have any control over the country’s national assets’. Indeed, any self-respecting nation with an iota of concern for national security should not tell terrorists or their former financers.  While this could be a generalized recommendation, those who know the context could not help by seeing the allusion. This refers to Lycamobile, a British virtual mobile operator and founder, A. Subaskaran.
Military intelligence agencies should provide an assessment of the gentleman if there is substantial evidence of any association with such entities, and individuals should be sanctioned. Any politician who lets terrorist financers, if any, in should be held accountable for treason, if not now, after the end of their term in office. Another legitimate concern is whether this is a set deal, though the privatization of SOEs is touted as a transparent exercise. 
One can not help but flashback to a previous term of Ranil Wickremesinghe as the prime minister, the central bank bond scam during the Yahapalanaya government. It was widely assumed then it was not a plot by a few individuals to loot the treasury but an orchestrated scheme to raise election finances for the presidential election. Some of the funds were then invested in building a pro-UNP media empire which also crumbled with the legal action that led to the freeze of finances by Aloysius’ business.
So did the UNP’s prospects of winning the presidential election after the allegations of the bond scam mounted. The Easter Sunday attacks sealed its fate.I have a strong hunch that history is about not only to rhyme but repeating. 

Well passed the Rubicon 
The third line of objection to privatization is that SOEs are now turning in profit after a period of colossal losses. CPC is making Rs.20 billion in profit, SLT Rs. two billion last year, and Sri Lanka Insurance Corporation Rs. 12 billion. However, the SOEs endowed with vast resources and state patronage are still underperforming relative to their private sector competitors. SLT’s profit ratio for the past five years is 6.5 % against its competitor Dialog Axiata’s 16.5%. Anyone visiting an SLT branch, anything outside Colombo, could also see the institution lagging a decade or more behind its competitors.
The stubborn reality is that none of the SOEs could perform to their potential under the current organizational structure, which also has inculcated a collective lethargy and lack of initiative. 
Some have pondered the means to revamp SOEs into a model similar to a State-owned Holding company such as Singapore’s Temasek Holdings. Though that is an inspirational solution to current rot, I feel Sri Lankan SOEs have passed the Rubicon of such a fix. Sri Lankan SOEs have treaded the exact opposite that their Singaporean counterparts did. That would make it extremely hard for Sri Lanka to evolve both managerial skills and a principled approach to run a behemoth that brings all SOEs under it without political interference and rent-seeking machinations. The success of the Singaporean state ownership in its companies represents an anomaly rather than the norm. In a similar experiment, Malaysia’s sovereign fund, 1MBD, was looted by then Prime Minister Najib Razak and his cronies. State building, alongside its economic apparatus, is a part of the wider civilizational exercise. It would be hard for Sri Lanka to get there anytime soon.
Second, assuming some miracle happens and everyone plays nice, SOEs could still not be the torchbearers of the modernization of the economy without substantial capital infusion. The government can not simply afford that. Borrowing costs for a country which has currently defaulted its external financial commitments would be extremely high. Sri Lanka could have turned its SOEs into regional players had Mahinda Rajapaksa opted for something similar to Temasek after the end of the war. Instead, he built a kleptocratic dynastic empire at the expense of the nation’s economy. 
If the government truly desires to build an asset base, a better approach would be diverting a portion of the proceeds from the sale of SOEs into a national startup fund, hiring people who know the subject to run it and finance the budding startups in return of a stake in these ventures. Some of them would grow into viable ventures, would create decent jobs and become torchbearers of economic modernization and leapfrog in technology and innovation; some others will die. Still, that would be a better gamble, which has paid out many parts of the world, than pumping public money into SOES, which are veritable black holes. 

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