• 25% of State revenue spent on wages and pensions
• Govt. may have to reach primary surplus to work with IMF

By Tanya Shan  Reforming the public sector is a topic that never fails to be discussed in election manifestos, at panel discussions of eminent economists, and in occasional news columns. However, meaningful reforms remain as elusive as dollars in the market today.   Reforms have long been stagnating at the discussion stage, without attempts to reach the implementation stage.  But today, the process is moving forward. The unprecedented economic crisis the country is enduring has forced the authorities to undertake reforms as soon as possible without further delays.  Government authorities are now exploring ways to transfer personnel from the overstaffed public sector to private sector export businesses. They are also discussing the privatisation of SriLankan Airlines, increasing utility tariff rates, allowing private sector players into markets which were once largely dominated by State businesses, and broadening the tax revenue base, along with attempts to cut down expenditure. All of this is finally happening thanks to pressure from the lender of last resort – the International Monetary Fund (IMF). Primary surplus As it looks to implement changes, how far should Sri Lanka go with these hard reforms? What are the measures that should be taken? The Sunday Morning spoke to LIRNEasia Founding Chair Prof. Rohan Samarajiva and Research Economist attached to Advocata Institute Rehana Thowfeek.  Samarajiva stated that about 25% of the tax revenue the Government received in 2021 was spent on settling the salaries of Government officials and paying pensions. This is regardless of interest commitments, loans, and other commitments Sri Lanka needs to pay. “This also leads to a situation where we are printing money, despite knowing the consequences very well. Now we are with the IMF. When you look at Article 4 or Staff-Level Agreements the IMF has with other countries, it clearly indicates that you need to achieve a primary surplus. In the past 74 years, we have achieved a primary balance in only three or four years under Mangala Samaraweera’s time at the Finance Ministry,” he said. Privatisation is key Samarajiva stated that there were three parts to the Government, the way he saw it. The first one is a core part of the Government, which is to do with law and order, national defence, administration, justice, and things of that nature. These activities or functions are done by departments, and almost everyone who works there gets a pension, according to him. “Then we have the next layer, which is boards, corporations, and companies that the Government owns. The original idea was that this layer would be commercial activities that the Government would get itself into. For example, the entry of the Ceylon Petroleum Corporation (CPC) when they nationalised oil companies. Here, the staff may not get a pension, but they tend to get EPF and ETF payments, more or less like they are in the private sector. I said three layers to put the forces in the third category, because one could argue that they belong in the first category,” Samarajiva noted. According to him, these three layers need to be dealt with differently. “With the corporations, companies, and boards, what we need to do is very high profile, high publicity and controversial privatisation. SriLankan Airlines should be number one. It has always been a money-losing airline and we need to get rid of it.  “Part of its stake was sold to Emirates earlier, but we cannot do that again due to tainted relationships. Now what we can do is sell it. Ashok Pathirage [current Chairman of SriLankan Airlines] is trying very hard to stop it, but if he is really worried he can buy it himself and risk his money. There is no reason for the taxpayers of this country to risk their money on the national airline,” he emphasised. Further, he noted that it should be privatised because its annual losses were equal to what the country spent on the Samurdhi programme – our biggest welfare programme.  Samarajiva added that India had demonstrated that a country as big as India was capable of thriving without a national airline and if Sri Lanka were to do the same, it would send a signal that the country was serious about reforms, which would also put fear into all the other corporations to think that they could be next in line. Holding company for SOEs “A subset of State-owned companies that have no social objective whatsoever and are only run with money-earning objectives should be taken and put under a holding company. The Government has to make sure that the holding company is insulated from political pressure and that they reconstitute the boards of these companies. They should be held accountable strictly on return on equities,” Samarajiva noted. He insisted that all 500 SOEs should not be put together under one holding company but a handful of them, to see whether this approach would work. Samarajiva stated that it had worked in Singapore and Malaysia and it may or may not work here, but Sri Lanka had to experiment with it and see. Different form of regulation for CEB Samarajiva stated that businesses like the National Water Supply and Drainage Board (NWSDB) and Ceylon Electricity Board (CEB) were loss-making businesses that posed a huge threat to the banking system. One way this could be resolved is by increasing tariff rates, which is something that has already happened in terms of electricity. He stated that there were no reasonable measures that could be taken to ensure a reduction in the CEB’s inefficiency, apart from subjecting it to a new form of regulation as the current regulations were clearly not working. “There is a whole series of things that need to be done. Providing people with drinking water and electricity cannot be purely a profit-maximising activity. It is an essential service that has to be provided. That is why these two institutions need to be treated separately,” he added. A smart armed force “We have excess people in the armed forces, even more than Great Britain. Half of the salary bill for public servants goes to the armed forces, which suggests that there could be some problems there. MP Patali Champika Ranawaka has explained several times that most of the money spent on armed forces goes on salaries, meaning they are a recurrent expenditure.  “They are not spending on strengthening the armed forces, by procuring drones and other equipment. They just keep paying salaries, having an excess of major generals, and just operate like that without trying to be smart. There is no investment in coast guard equipment or in vessels,” he explained. Samarajiva emphasised the importance of having a national defence strategy that prioritises a smart armed force. Importance of digitalisation Samarajiva noted that when he was heading the Information and Communication Technology Agency (ICTA), the overall amount spent on digitalisation of the State sector was merely Rs. 2 billion, whereas it had cost Rs. 3 billion to construct a kilometre of the Matara-Beliatta Highway. “If you do not spend, you don’t get the right results. The administration of justice needs to be digitalised. It takes 13 years to finalise a murder case. We have a broken justice system, which needs to be improved. Instead of making the Government smart, we have made it large. Hard decisions like a freeze on training have to be taken,” he added. Reflective pricing mechanisms Meanwhile, Thowfeek stated that energy reforms were important but there had already been some progress with cost-reflective pricing mechanisms for fuel and the recent electricity tariff revision.  “We have already seen price revisions of both fuel and electricity to reflect market prices; that is one part of the reforms. Energy pricing reforms are key. The CPC and CEB accumulated very high debt. Energy price reforms will prevent future losses from accumulating. They have to look at the debt and figure out how it will be repaid,” she added. Case-by-case SOEs Thowfeek further stated that individual SOEs had to be looked at in line with their contribution to society to decide on next steps. “The Government has to see whether it should be sold or not, whether private sector competition is needed, and so on. More fuel distributors are being looked at right now; this is one way of infusing competition into the market,” she added. Progress being made When The Sunday Morning spoke to the Ministry of Labour, a spokesperson confirmed that measures were underway to transfer staff from the overstaffed public sector into the export sector. With the recent political developments, this move has reportedly been held up. However, the spokesperson said with the appointment of the subject minister, progress was now being made in the transferring of public sector officials.  Speaking to The Sunday Morning, a senior Treasury official disclosed that plans for privatisation of SriLankan Airlines were in the cards, while a policy framework was also being drafted, which included public sector policy reforms.  The official also disclosed that the relevant ministry was in the process of transferring staff from the overstaffed public sector to the private sector, adding that however, the Treasury was yet to be updated on the matter. The official further noted that other reforms including fiscal reforms were being looked into.