According to recent Government statements, all State-Owned Enterprises (SOEs) are set to undergo reforms to improve governance and prevent corruption. The Boards of Directors of SOEs are to determine whether continuation, reforms, or private capital are necessary. 

In this context, the nature of anti-corruption reforms to be implemented and the measures to ensure sustainability are critical concerns.

Speaking to The Sunday Morning, Minister of Media and Cabinet Spokesperson Dr. Nalinda Jayatissa stated that in order to implement governance and anti-corruption reforms, the Government would assess each SOE individually, adding that the relevant ministries were currently in the process of designing restructuring plans. 

“It is difficult to announce a general reform strategy as the changes will be tailored to the specific needs of each SOE. Therefore, these enterprises will be examined on a case-by-case basis. There is no centralised common body or designated ministry overseeing this process yet, nor is there a set timeline for implementation at this stage,” he said.  

According to International Monetary Fund (IMF) Senior Mission Chief for Sri Lanka Peter Breuer, Sri Lanka’s SOEs could remain either State-owned or be privatised.

Need for effective establishment of preventive mechanisms

 Former Director General of the Commission to Investigate Allegations of Bribery or Corruption (CIABOC) Sarath Jayamanne, PC told The Sunday Morning that the Anti-Corruption Act, in particular Sections 30-40, outlined various preventive measures that should be taken by both the Government and private sectors. 

Accordingly, the act states that there should be an anti-corruption mechanism in each and every institution and that research should be conducted, including all stakeholders, to obtain their views in order to prepare this anti-corruption plan.

“An anti-corruption plan suggests that these enterprises must identify areas vulnerable to corruption and implement mechanisms to minimise such opportunities. For instance, procurement must be transparent and online visibility would help as well, as it would allow people to be aware. 

“There must also be an integrity officer in each and every Government department who must identify vulnerable areas and suggest mechanisms. Using CCTV or online platforms will be helpful,” Jayamanne said. 

He noted that there should be no space for secretive decision-making, adding that there should instead be different layers to the mechanism, where each transaction is witnessed by several key players, rather than awaiting action after corruption occurs or awaiting CIABOC investigation post-crisis.

Furthermore, he explained that an anti-corruption mechanism was established with a preventive purpose. The National Action Plan drafted in 2019 discusses short-, medium-, and long-term measures regarding what must be done at the management level. 

Another important aspect, according to Jayamanne, is conflict of interest. He emphasised that it should be assessed whether decision-making personnel in these entities were linked to service seekers in any way. If such a connection is found, it should be reported to higher management, since it could otherwise lead to a conflict of interest. 

“Failure to report such connections regarding a conflict of interest would then be a criminal offence according to the act. Likewise, there should also be awareness programmes for SOEs with ongoing training initiatives. These measures can help minimise opportunities for corruption,” he noted.  

Additionally, Jayamanne noted that vulnerable SOEs should be bound to provide asset declarations to the special directorate of the CIABOC. 

With the implementation of the Anti-Corruption Act No.9 of 2023, CIABOC is further empowered to carry out investigations on-motion or in collaboration with other institutions. Many new offences have also been introduced, with the preventive aspect strengthened and given a wider scope.

Corruption in procurement

 The Government retains ownership and control over 300-500 public corporations, including 52 strategic SOEs. However, research shows that as of 2021, the total SOE debt, excluding financial public corporations, stood at Rs. 1.8 trillion, while the total cumulative losses from 2007 to 2021 amounted to Rs. 1.5 trillion. 

Furthermore, according to Verité Research, Sri Lanka incurs an estimated annual loss of around 1% of Gross Domestic Product (GDP), amounting to approximately Rs. 300 billion, due to corruption in Government tender procurements. 

This issue is primarily driven by a lack of transparency, as fewer than 35% of tenders are published online and just 9% of public authorities adhere to disclosure standards required under the Right to Information Act. The absence of transparency in Sri Lanka’s procurement process facilitates corruption, with estimated corruption-related losses at 10-25% of public contract values.

Speaking to The Sunday Morning on the economic cost of corruption in SOEs, Advocata Institute Chairman Murtaza Jafferjee explained that the best way to cap large losses was to ensure that the State banks did not simply lend to cover losses, and that Treasury guarantees were not given permitting a loss-making SOE to continue to make losses. 

He noted that policy blunders and getting SOEs to subsidise non-commercial obligations were the main reasons for large losses.

“For instance, the fuel price formula has not been adhered to in January. Moreover, diesel and petrol prices should have been increased by Rs. 20/l due to an increase in Brent crude oil prices and the rupee depreciation,” he said.  

Jafferjee added that when SOEs were gazetted under line ministries, these entities became a vehicle for political and economic extraction, such as jobs for party supporters or resources to fund a minister’s electoral agenda. 

Expanding on how corruption affected SOE finances, he noted that corruption was mainly observed through procurement, especially in instances of buying too high or selling too cheap. However, he noted that this was not the main source of losses.

“The main source of losses are due to non-commercial obligations, excess overheads due to overstaffing, incorrect management practices, and incompetent business leaders in these businesses,” he stated.

Addressing loss-making sectors that are most vulnerable to corruption, Jafferjee outlined that electricity and petroleum sectors were the most notable entities, as many stakeholders of these entities, such as employees and suppliers, ended up earning through these means.

Enhancing efficiency through anti-corruption

The IMF Governance Diagnostic Assessment (GDA) outlines that the Ministry of Finance at the time had not compiled consolidated reports on the financial performance and investment activities of SOEs, nor had it conducted systematic risk assessments of their operations, despite the substantial public investment allocated to SOEs. 

The GDA report also highlighted systemic governance weaknesses and corruption vulnerabilities, particularly in areas such as budget credibility, expenditure control, public investment management, and oversight of SOEs. Additionally, corruption in SOE procurement was identified as a substantial concern, especially due to uncompetitive practices and limited transparency within the procurement system. 

Meanwhile, University of Peradeniya (UOP) Department of Economics and Statistics Professor J.M.A. Jayawickrama noted that one of the main issues with SOEs was inefficiency and mishandling, such as overstaffing, not following procurement procedures properly, high operational costs, and corruption.

“To use a different management model, either by prioritising or through a Public-Private Partnership (PPP), a strong evaluation mechanism should be established in SOEs, especially the loss-making ones. The Government should effectively identify the loss-making enterprises, analyse the reasons, and initiate the process of establishing a different management mechanism,” he stated. 

He noted that corruption must be prevented to avoid inefficiencies, especially considering the Government’s mandate against corruption. Combating corruption is essential for making SOEs viable, alongside addressing other factors leading to losses, as well as utilising private investments and PPPs if necessary. 

However, according to Prof. Jayawickrama, only marginal action has been implemented thus far to tackle corruption. He stressed the importance of changing the system and implementing effective anti-corruption practices rather than merely adapting to the existing system. 

“It is important that authorities identify and highlight which enterprises are unable to manage under State ownership, provide solutions, and implement a strong, overarching management entity from the top down. If loss-making enterprises are not reformed, they will obstruct other economic activities of the Government,” he said.  

Prof. Jayawickrama explained that SOEs must operate at least at the break-even point without incurring losses. Corruption was a major issue in many institutions, he noted, along with over-staffing, over-payment, and bonus payments of salaries despite ongoing losses. 

“These are management issues that the Government must take the lead in addressing by introducing performance-based salary structures and ensuring that these enterprises remain competitive with reasonable pricing.

“If the Government lacks the resources to enhance efficiency and eliminate corruption by addressing these pertinent issues, then it is necessary to invite private investment or sell shares on the stock market,” he added. 

Need for a comprehensive reform strategy

Speaking to The Sunday Morning, Transparency International Sri Lanka (TISL) Advocacy and Research Officer Dhewni Dias stated that to effectively curb corruption in Sri Lanka’s SOEs, the Government must adopt a comprehensive reform strategy that strengthened transparency, accountability, governance, and risk management, while ensuring broad stakeholder engagement throughout the process.

“As highlighted in the Civil Society Governance Diagnostic Report of 2023, the Government must amend existing legislation such as the Fiscal Management (Responsibility) Act No.3 of 2003 to mandate clearer and more consistent reporting practices for SOEs. 

“This would require all key SOEs to publish timely audited financial statements disclosing financial performance, investment activities, and debt liabilities, while addressing the issue of debt arbitrarily being shifted between the central Government and SOEs,” she said. 

Dias further explained that the IMF GDA recommended all commercial SOEs to register under the Companies Act No.7 of 2007, including the anticipated amendment introducing a beneficial ownership register, ensuring visibility, uniform standards, and corporate governance. Adopting a holding company model for SOEs, promoting strategic alignment, and effective oversight is also suggested. 

Parallely, she noted that a strong legal governance framework must be established to eliminate longstanding vulnerabilities in leadership appointments, procurement, contracting, and other operational areas.

“The establishment of regular and comprehensive auditing practices, including financial, organisational, and programmatic assessments, and systematic risk analysis is essential as this will disclose SOE operations, allowing for early detection of irregularities, corruption vulnerabilities, and the swift implementation of corrective actions,” she said. 

Dias also emphasised the significance of ensuring meticulous follow-up on the recommendations issued by oversight committees, such as the Committee on Public Enterprises (COPE), Committee on Public Accounts (COPA), and the Committee on Public Finance (COPF). 

She added that the Government must establish a mechanism dedicated to monitoring the implementation of these recommendations within SOEs, including regular audits, progress assessments, and public reporting, clearly outlining the status of corrective measures.

“The Government should strictly enforce a comprehensive governance framework for SOEs based on Organisation for Economic Co-operation and Development (OECD) principles of corporate governance to ensure that SOEs operate efficiently and transparently, meeting high standards of performance. 

“This consists of guidelines for managing the responsibilities of the Government as a company owner, outlining the need for rationales for State ownership, the State’s role as an owner, the positioning of SOEs in the marketplace, equitable treatment of shareholders and other investors, stakeholder relations and responsible business practices, disclosure and transparency, and the responsibilities of SOE boards,” Dias explained.

She further noted that it was important that the Government thoroughly drove these improvements in financial performance and operational efficiency while reinforcing public accountability and trust. Dias also highlighted the creation of an independent advisory team, comprising local and international experts as well as civil society organisation representatives for a collaborative reform process. 

This will ensure that appointments are based on merit and expertise, thereby eliminating room for cronyism, nepotism, and favouritism. Moreover, she noted how this would in turn compel SOEs to maintain independent oversight and professional management, reducing the risk of corrupt practices.

Dias further explained that to ensure sustainability of reforms, in addition to a comprehensive policy framework, the approach must be participatory and strong, ensuring that reforms were not vulnerable to political motivations.

“It is necessary to establish a legal framework that clearly defines and categorises SOEs, distinguishing between commercial and non-commercial enterprises, while a strong national procurement law is needed, closing loopholes and covering all aspects of procurement, including unsolicited proposals.

“The recently published Public Procurement Guidelines of 2024 were challenged by TISL in the Supreme Court, alleging that they allow for unsolicited proposals to go unregulated, highlighting the need for reforms that subject all SOEs to rigorous oversight,” she stated. 

Financial strain 

Additionally, Dias emphasised that strong public financial management legislation was important to ensure that SOEs were not exempt from standard financial disclosure and procurement procedures.

“For all reforms to be truly sustainable, legislative measures must be immune to political and regime changes, requiring the need for rooting these reforms as national policies. Further amendment and effective enforcement of the Regulation of Election Expenditure Act No.3 of 2023 is also critical as the disclosure of political donations and campaign finance regulation can limit the potential for political favouritism in SOE appointments and leadership,” she said. 

Dias stated that in 2022, corruption in Sri Lanka’s SOEs was estimated to have caused annual losses of approximately Rs. 744.6 billion according to the Advocata Institute, with implications on significant per capita costs, including Rs. 1.7 million per registered taxpayer, Rs. 33,949 per citizen, and Rs. 141,809 per household, in addition to shifting and inflating the national debt compounded by the misuse of SOEs as vehicles for borrowing. 

She further highlighted that corruption in SOEs was particularly damaging because these enterprises managed public funds without effective oversight, as SOEs lacked the same market pressures as private companies, excluding SOEs from competition and accountability.

“Reportedly, as of 2022, the Ceylon Petroleum Corporation lost Rs. 61.9 billion, SriLankan Airlines Rs. 24 billion, the Sri Lanka Transport Board Rs. 3.2 billion, the Ceylon Electricity Board Rs. 0.9 billion, and the National Water Supply and Drainage Board Rs. 0.8 billion,” she listed. 

Addressing the resultant major financial burden on the national economy, Dias noted how these weakened Government finances and undermined national savings, placing strain on public resources. 

She explained that this spilt over into social and economic issues, which could be seen in the form of discouraging investment and innovation as well as weakening public trust, contributing to a cycle of corruption impacting the national economy.