The debate regarding whether the Government should engage in business goes back for decades. The conversation has now shifted towards whether all State-Owned Enterprises (SOEs) need to be restructured or if it should only be applicable to loss-making SOEs.
The current conversation on restructuring profit-making SOEs also indicates that there is a clear social consensus on the need to restructure loss-making SOEs.
It is said that theory without data and data without theory are equally dangerous. Therefore, approaching SOE restructuring solely based on the profits and losses of these enterprises is similar to approaching a problem without having the basic principles right.
Profit vs. loss not the determining factor
The primary role of a government is to ensure a level playing field and protect all citizens. A government can only protect its citizens by building institutions and fulfilling its regulatory role, rather than by engaging in business. Its role can be likened to that of a parent.
Just as a parent should not complete their child’s homework or classwork on their behalf, since it would ultimately do more harm than good to the child’s future, the government’s role should not involve doing business. Instead, the government’s principal role should be that of a regulator.
Becoming a regulator and a market player at the same time is the same as trying to simultaneously become a match referee and a player simultaneously. It is likely that both functions will not be carried out effectively. Therefore, it is not about profit or loss, but about the fundamentals and principles.
If we made a decision solely based on profit and loss, what would happen if a loss-making enterprise turns a profit next year? Would we have to reconsider the decision-making process in the midst of the entity being privatised? On the flip side, what if a profit-making entity incurs a loss next year?
Instead of focusing on profitability, it is important to note that the Government already has the means to intervene in business through the tax system. The Government is entitled to a 30% tax on profits and a 15% tax on revenue. This ensures that the Government receives a share of more than 50% in every business without having to actively engage in operations and assume any risk. Therefore, the basis of profit or loss has no ground.
The classic contradiction in being a regulator and a player can be witnessed in the case of Sri Lanka Insurance Corporation (SLIC).
In this case, the Government issued a mandate for all insurance companies in Sri Lanka to split all insurance businesses into Life Insurance and General Insurance. However, the State-owned insurance company – SLIC – was exempted from this requirement. The Government also heads the Insurance Regulatory Commission, making it a player and a regulator at the same time. Therefore, unsurprisingly, the Sri Lanka Insurance Corporation turns a profit.
Most of the Government’s big businesses are passed on to SLIC and it operates above the rules set by the Government itself. Accordingly, if we consider purely on the basis of profit, other State institutes could request similar preferential treatment in order to make a profit. Therefore, profit and loss should definitely not be the deciding factor in restructuring SOEs.
When the Government should intervene
The Government can consider intervening in specific cases, such as in instances of market failures or natural monopolies given the size of the market in Sri Lanka. However, Government intervention should be aimed at enhancing the market rather than assuming the role of a private player.
Government intervention can be justified when the social value outweighs the economic value. For example, if road transportation is not available in an extremely rural and less populated area, the Government may consider providing a subsidy for private transport operators or even operate its own buses to ensure the mobility needed for people.
State-owned doesn’t mean people-owned
Another common misperception is that State-owned is equal to being owned by the people. In reality, State institutes are owned by the friends and family of a few politicians, rather than being truly owned by the people.
Ideally, ownership by the people should mean that it is run by the private sector and listed on the stock exchange. This allows people to buy shares, trade shares, and earn money through dividends or trading shares when the companies do well.
We need to focus on the value for money aspect and the problems solved by a business instead of ownership. If we consider a train ride, what matters to us is not the owner of the train but whether we can have a comfortable, punctual, and convenient train ride at a reasonable price.
The objective of the train service is to offer a service and provide value for money for the passengers which is more than the value they spend on the train ride. It is pointless to have a business if it does not solve a problem or add value to someone else.
In the process of restructuring SOEs, before any matters relating to ownership, we must ask ourselves what value SOEs add to our lives and what we get in return as value addition.
Furthermore, it is vital that we keep the restructuring process transparent, since restructuring should not be the process of converting Government monopolies to private monopolies or handing over these entities to political henchmen at dirt cheap rates.