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Underperforming SOEs To Add Over Rs 1.5T To CSE Empty Underperforming SOEs To Add Over Rs 1.5T To CSE

Sun Dec 04, 2016 10:43 am
Listing of underperforming State Owned Enterprises (SOEs) on the country’s bourse – Colombo Stock Exchange (CSE) is slated to add a minimum of Rs 1.5 trillion to the burgeoning market capitalization of Rs 2.69 trillion.

Presenting Budget 2017 Finance Minister Ravi Karunanayake implied that his government has been proactive in improving the performance of both strategic and non-strategic SOEs by infusing professionalism and operational independence.

“… in fact instead of becoming a drain Rs.50 million on the government coffers, they have contributed Rs. 65 billion as levies and dividends so far in 2016, which is an increase of almost 50 percent over 2014…. As stated by the Honorable Prime Minister, we will facilitate SOEs to become viable business entities. To that end, we will ensure that SOEs will be able to have cost reflective pricing structures and operational autonomy. In this background government will also enter into performance contracts with selected SOEs with regard to key performance indicators.”

According to the Minister, government was inclined towards listing non-strategic SOEs not with the motive of privatizing but broadbasing the ownership of public enterprises.

“We will also list non-strategic enterprises such as Hyatt, Grand Oriental Hotel, Waters Edge, West Coast, Manthai Salt, Hambanthota Salt and Hilton during 2017. Broad basing the ownership, it is expected that such listing will allow the government to raise at least USD 1,000 million, to settle our existing uneconomical, questionable and high cost debt that we inherited from the previous regime. We will also inform the Parliament of any other planned listing that may be undertaken during 2017,”

Although the exact model of listing is to be finalized in 2017, the listing is a step in the right direction expected to at least both increase state revenue and market capitalization by a minimum of Rs. 1.5 trillion. Colombo Stock Exchange (CSE) has 295 companies representing 20 business sectors with a market capitalization of Rs. 2,691.66 billion as at 1 December 2016.

Beyond carrying out regulatory functions, the state itself is a major participant in the market through its large stateowned enterprise (SOE) sector and public service, which in turn has impacted competitiveness in a number of sectors and labor market dynamics. SOEs have a significant market share in many sectors, including areas where there is not a strong apparent rationale for public intervention. This is most striking in the finance sector, where major SOEs make up close to half of the market. At the same time, there is a weak framework for public-private partnerships and relatively few cases of PPPs; infrastructure development over the past 10 years has been driven by direct public spending. Finally, the state plays an outsized role as an employer. There is strong demand for public-sector jobs as public-sector workers enjoy the advantages of formal employment and other benefits such as a pension. Moreover, the evidence suggests that there is a salary premium for public-sector workers and that this premium has grown between 2006 and 2012. Workers, particularly educated women, are queuing for public-sector employment.

There are 55 major SOEs enterprises covering a wide range of sectors. The 10 most important SOEs, which account for about 90 percent of the asset base of all major SOEs, are financial institutions (Bank of Ceylon, People’s Bank, National Savings Bank, and Sri Lanka Insurance Corporation), major public utilities (Ceylon Petroleum Corporation, Ceylon Electricity Board, and the National Water Supply and Drainage Board) and logistics/transport service providers (Sri Lanka Ports Authority, Airport and Aviation Services, and Sri Lankan Airlines). There are other smaller SOEs in banking, public utilities and logistics as well. Finally, the government has major SOEs in other sectors, including construction, livestock, lotteries, media, marketing and distribution, plantations, pharmaceuticals, industrial estates, mineral extraction, general trading and timber sales. Major SOEs accounted for nearly 17 percent of GDP in 2013.

SOEs play a significant role in Sri Lanka’s fiscal balance. Transfers from the budget to public enterprises have averaged about 3 percent of total expenditures (around 50 billion LKR), mainly driven by direct transfers and on lending to the Ceylon Electricity Board (CEB). The total debt of the 55 major SOEs accounted for approximately 4.8 percent of total public debt in 2013. This number reflects reductions in debt thanks to conversions of debt to government equity and capital infusions to strategic State-Owned Business Enterprises (SOBEs), which have regularly occurred and were particularly large in 2013.

Moreover, SOEs account for a significant share of lending. The two largest banks in the country continue to lend a significant share of their funds to SOEs, including several that are loss-making or non-revenue-generating enterprises.

In 2013, Bank of Ceylon (the largest bank by asset base and lending portfolio, holding 20 percent of market share) lent 38 percent of its total portfolio to SOEs (primarily to Ceylon Petroleum Corporation, Sri Lanka Ports Authority and Road Development Authority); and People’s Bank (the second largest bank with 15.6 percent market share) lent 28 percent of its total portfolio to SOEs (with high exposure to Ceylon Electricity Board, Ceylon Petroleum Corporation, and Ceylon Fertilizer Company Ltd). Since these banks account for a large share of the banking industry, this high SOE exposure could reduce funding available to the private sector and expose the banking sector to systemic risks given the precarious financial positions of the concerned SOEs. ... 5t-to-cse/
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