Sri Lanka has recently witnessed several monopolies, bringing the macroeconomic implications of anti-monopoly policies into focus.
Many stakeholders argue that while it is essential to avoid unhealthy market competition, fostering proper private sector participation is equally critical, especially given the current fiscal challenges.
Striking a balance between maintaining a level playing field and encouraging private sector engagement demands careful consideration, raising questions about the kind of role the option of increased State intervention will play in order to mitigate this.
Speaking to The Sunday Morning, Minister of Industry and Entrepreneurship Development Sunil Handunneththi added that there was no single specific policy that had been announced in terms of addressing private sector monopolies.
“What the Government is trying to do is strengthen the production economy. In order to work towards this target, we work collaboratively with the private sector, which will reduce the opportunity for monopolies.
“For instance, it seems that there is a monopoly in rice. To foster competition, the Government has taken necessary actions, such as strengthening Sathosa and the State Trading Corporation (STC). This will not weaken the private sector but rather strengthen State-Owned Enterprises (SOEs) for healthy competition.”
Moreover, addressing the need to strengthen private sector involvement going forward, he said that one of the main issues in the sector was debt. Particularly, there are many MSMEs facing parate execution. The financial sector must provide enhanced support to address these issues and the Government is providing the necessary support in these areas.
“Facilitating technology is another aspect. Also, the export sector in the country lacks Government contribution. In the market, we hope to move productions beyond basic levels to value addition in order to address this,” he said.
Need for a national macroeconomic policy framework
University of Colombo (UOC) Department of Economics Professor Priyanga Dunusinghe told The Sunday Morning that it was important to employ a macroeconomic perspective regarding the market, addressing aspects such as State intervention and expanding private sector involvement.
“Not just in Sri Lanka but in the context of other developing countries as well, there are instances where the government may fail in carrying out businesses due to economic reasons. In such a scenario, we need to think in the long run. It is important to make sure that in the long run, regardless of the government, businesses will not become a burden on revenue and expenditure.”
He noted that it was crucial to ensure that businesses could run on their own, rather than depending on the Government. In such a context, there is no need for the Government to take up matters in the private sector, as the private sector is well developed and capable.
Noting the significance of private sector involvement going forward, he said that the Government should allow the private sector to participate fully in the economy, where the private sector could function properly without market failures. In particular, there are some sectors where the private sector can grow effectively.
“Generally, Government intervention can be rationalised in three areas, such as whenever there are market failures, in the case of development objectives, and for strategic objectives. Outside of these contexts, the Government ideally should not be operating businesses.
“The Government must establish a macroeconomic policy framework or a national development policy framework to determine if sectors require Government intervention. Without such a national policy framework, ministers cannot clearly identify which sectors require Government intervention and which require increased interest in private investments.”
Prof. Dunusinghe highlighted that the country should now develop at least a 10-20-year policy framework, which would help officials gain a clear idea of the economic path forward. He further noted that it was essential to consider the economy from a macro perspective, since examining it in a microscopic manner would not be beneficial.
“It is important to send a positive signal to private investors, both local and foreign. Situations of increasing Government presence in industries can lead investors to hesitate, particularly given past contexts. Government presence often leads to State intervention in sectors rather than reliance on market forces. This can discourage investment, as stakeholders may easily influence public policy, negatively impacting the private sector,” he said.
He added that it was vital to facilitate a conducive environment that allowed private sector involvement and to play a supportive role where necessary, particularly at this juncture, given the lack of fiscal space where the Government lacked the fiscal capacity for high-quality investments over the next 5-10 years.
He noted that there was a lack of investment in certain public enterprises, such as in human resources, technology, and infrastructure. Operating in such a manner leaves the public reluctant to use these services. In such a context, the Government should engage the private sector to invest and ensure that the people benefit.
An enabling environment and focus on regulation
Addressing the macroeconomic nature of a conducive environment, Verité Research Lead Economist Raj Prabu Rajakulendran highlighted the significance of an enabling environment where businesses are encouraged to operate freely.
“Any case of placing excessive bounds and controls on businesses can certainly lead to negative results. What is important now is ensuring that Sri Lanka benefits from inflows; tourism and worker remittances alone will not suffice. This is connected to the need for creating an enabling environment. The possibility of Sri Lanka avoiding another restructuring depends almost entirely on this,” he stressed.
Meanwhile, speaking to The Sunday Morning, First Capital Chief Research and Strategy Officer Dimantha Mathew noted that it was likely that the cost would remain high in businesses that came under Government control. Additionally, even if services are provided at reasonable prices, these entities would suffer losses.
He noted that preventing monopolies was essential; since this can be regulated through various measures, the Government needs to enhance its focus on regulation.
Mathew added that adopting a Public-Private Partnership (PPP) model was a viable option, as it allowed some level of authority to remain, which could prove to be the best option in certain areas. Creating more competition in the market in the medium term will improve productivity, efficiency, and overall growth in the system.
Commenting on privatisation requirements, he noted that the Government must undergo some form of restructuring to advance the International Monetary Fund (IMF) agreement. However, in the long term, if the country is to improve its Gross Domestic Product (GDP) beyond the level achievable through organic growth, which is around the 4% mark, it will have to attract sufficient Foreign Direct Investments (FDIs).
In comparison to the region, Sri Lanka appears less attractive to FDIs, especially when considering factors of production such as land, labour, entrepreneurship, capital, and approvals. Sri Lanka is far behind, making it less competitive. Mathew noted that this had been evident over the past 10-15 years.
“To address this, privatisation is a major option available, as it opens up the market. Efficiency, sustainability, and productivity are natural outcomes of privatisation. Sri Lanka’s high costs could be reduced through privatisation or restructuring,” he noted.
Important to balance biz concentration
In many industries globally, depending on the structure of the industry, there are tendencies towards concentration, especially in sectors requiring economies of scale and significant factors of production.
Frontier Research Head of Macroeconomic Advisory Chayu Damsinghe noted that the important consideration was how to tackle and balance these types of concentrations, as it was essential to explore ways to reduce concentration, facilitate multiple players, and create choices and competition.
If these are not feasible, the question arises whether to allow monopolies with strict regulations or for the Government to retain some level of control. “Several options exist. In my opinion, the policies adopted should align with a case-by-case approach,” he noted.
The macroeconomic effects of any case of State intervention, he noted, depended on the industry and the level of concentration or Government involvement. In Sri Lanka, for instance, the Government’s heavy involvement in the healthcare and education sectors has been quite successful. However, there are other contexts where Government involvement may not be ideal.
“It is context-dependent and a key element is considering the stakeholders in assessing industries. Macro-economically, if the Government is significantly involved in a small part of the economy, it might not necessarily impact the overall economic aspect. However, it can influence business sentiment.”
He highlighted that the impact varied, as it was based on a case-by-case context, which changed from country to country and over time.
Thus far, Sri Lanka has lacked a comprehensive framework to curb anti-competitive behaviour. However, elements promoting competition are scattered across 37 laws, as noted by a Japan International Cooperation Agency (JICA) assessment. These provisions involve both regulatory agencies and service providers, with responsibilities dispersed among them. This highlights the need for a stronger regulatory framework to enhance healthy competition in the market.
Moreover, there have been concerns regarding the Government’s stance on private sector monopolies. For instance, recent statements regarding ice manufacturing and cold room facilities at fisheries harbours were indicative of retaining some level of Government control to avoid monopolies.
However, upon being questioned by The Sunday Morning, a spokesperson from the Ministry of Fisheries stated that several ice plants and cold room facilities under the Ceylon Fisheries Corporation (CFC) and Ceylon Fishery Harbours Corporation (CFHC) were currently leased to private operators. Additionally, there are a number of privately owned ice plants.
It was further noted that a discussion was recently held with ice plant owners to address the high price of ice, including concerns about the lack of price reductions following electricity tariff revisions. The ministry emphasised the need for favourable price adjustments to support fishermen in sustaining their livelihoods while ensuring that ice plant owners could operate their businesses profitably and fairly.
“The ministry remains committed to fostering fair market practices, ensuring quality standards, and supporting fishermen and ice plant owners to ensure the sustainable growth of the fisheries sector,” the spokesperson said.