Conscious of strong employee resistance to privatisation of state-owned commercial enterprises, Sri Lanka´s former United National Party (UNP) government thought of an imaginative way to sugar coat the pill—gifting employees of companies that were being sold with 10 percent of their shares, free, gratis and for nothing. But the first privatisation in 1989 of United Motors Ltd, a government-owned motor vehicle importer holding the profitable Mitsubishi agency and running a repair workshop in Colombo, hardly generated any wild excitement either among the company´s few dozen employees who were getting 10 percent of its equity without charge, or among the general public to whom the rest of its shares were offered at par.
That was hardly surprising given the country´s condition at the time. The Janatha Vimukthi Peramuna (jvp, People´s Liberation Front), into its second armed insurrection after 1971, had brought the country to the brink of anarchy. In 1988-89, Colombo was embroiled in two wars, one in the northeast with the Tamil Tigers that had forced President J.R. Jayawardene to bring in Indian troops and the other against the jvp.
Most agreed thai the liming of the United Motors privatisation was fatal. Who but a fool would buy shares in any company that was being divested by the state when the very viability of the state was in question? But President Ranasinghe Premadasa, who succeeded Mr Jayawardene, and his government were determined to soldier on with the privatisation agenda despite the terror that stalked the land and that fact the business confidence had plummeted to zero.
Predictably, there were very few takers for the shares on offer and most of them devolved on the underwriters. The government did not even bother to formally distribute the free employee shares at that time. But the picture was to dramatically change just a few weeks later when, by the end of 1989, the security forces broke the back of the JVP insurrection and liquidated its leadership. Sri Lanka´s business climate improved dramatically and the United Motors share appreciated almost three-fold. That was when United Motors´ employees got their share certificates and government made good propaganda of employee benefits from privatisation.
The free-market formula was based on the number of years of service an employee had put in the company that was being divested by the state, regardless of his or her position or salary. The gardener who had served longer than the managing director got more shares. And there was no requirement that benefiting employees had to hold on to their shares. They were perfectly free to sell them on the market if they so wished. Many of them did and there was no lack of buyers.
With the stock market beginning to take off by the time the first free shares were distributed, Mr Premadasa was not slow in reaping political mileage. The state-controlled media, particularly, made great play of the fortunes that small people had made out of their free shares, and the sugar coating certainly tasted extra sweet. The free-share strategy seemed to be working nicely where most companies down for privatisation were concerned with little or no employee resistance.
But it did not work everywhere, especially not in the nationalised tea and rubber plantations, and adaptations had to be made. Mr Premadasa understood very well that complete privatisation of the plantations would be difficult with strong trade union resistance inevitable. Also, it would be politically suicidal giving tree shares in plantation companies to their resident Indian (of recent Indian descent) labour while the neighbouring indigenous villagers suffered from acute land hunger. The president, therefore, decided to privatise the management of the plantations and give the workers 10 percent of the profits rather than a 10 percent equity share.
Between 1989 and 1994, when the UNP government ruled, 23 state-owned enterprises had been privatised. The new People´s Alliance government of President Chandrika Kumaratunga, accepting the reality of the need for the process to continue despite steadfast opposition from its leftist constituents, had, between
June 1994 and the end of 1996, privatised a further 23 enterprises, netting government coffers a revenue yield of SLR 8.2 billion. Among the businesses that the incumbent government had divested were 13 regional plantation companies, a gas distribution company and a duty-free operator at Colombo´s Katunayake Airport.
Special conditions were imposed for plantation companies. The buyers were given loans for capital development of the estates. Government, however, retained a ´golden share´ in each of these companies with wide-ranging veto powers as well as the right to periodically look into their accounts. Such restrictions did not totally inhibit buyer interest, although the early plantation privatisations yielded less than true value to state coffers. The picture has since improved.
The government had hoped to derive considerable budgetary support from privatisation proceeds and even use some of the surplus to retire public debt, but the going has been slower than anticipated. There were also some unforeseen problems relating to the divesting of some of the plantation companies, with a couple of early buyers flogging their acquisitions for fat profits to companies with foreign links. Concern has been expressed about Indian interests like Tata Tea having bought into the Lankan tea sector. Critics said this would be to the long-term detriment of Ceylon Tea.
Excellent tea prices in 1996 and a buoyant rubber market have made plantation companies most attractive to buyers and this is expected to be reflected in what the remaining companies will letch. State authorities have also learnt their lessons from early mistakes. One of the worst of these related to the handing over of the government´s gas monopoly to Shell. Shell has within five months of takeover twice raised cooking gas prices, provoking a howl of consumer protest. “Is this the much-vaunted efficiency of the private sector and the promised ´benefit´ to consumers?” asked one critic.
Embarrassed, the government announced that the deal with Shell would be re-negotiated. Shell-shocked by the flak it has taken, and looking also at other petroleum-related privatisations clown the road, Shell has until now not resisted that proposal. Once the biggest importer and distributor of petroleum products into Sri Lanka until the industry was nationalised by the first Sirima Bandaranaike government in the early 1960s, Shell is looking forward to once again playing a major role in the petroleum industry of Sri Lanka. Buying the gas distribution arm of the state-owned Ceylon Petroleum Corporation was only a first small step in that direction. In addition to the second gas price increase which has been widely considered mala fide, there has also been a scandal of the same firm of Colombo lawyers representing both Shell and the vendor, the Public Enterprise Reform Commission (PERC) of the government, in wrapping up the gas facility sale deal. On top of that, constituents of the government itself are becoming more vocal in their opposition to privatisation. Recently, angry employees, egged on by groups including some government MPs, obstructed the South Korean buyers of the Ceylon Steel Corporation from entering the premises. In a tense situation, nearly a thousand police-men had to be deployed to enable the buyer to take possession of his property.
Privatisation is the cornerstone of Sri Lanka´s move towards a market-oriented economy. But there has to be a trade-off between equity and efficiency. It is generally agreed that the private sector is better equipped to run commercial enterprises than the state. But profit is what private business is all about, and concerns about equity such as providing socially desirable services at affordable prices come low down the priority list of any privately owned commercial undertaking.
That is why Sri Lanka´s ongoing privatisation is a walk on thin ice. It is particularly difficult on the Chandnka Kumaratunga administration in view of the socialist ´baggage´ it carries as well as the history of all its coalition constituents. But the demands of the major donor agencies and of its own budget, the conviction of the president and her inner cabinet, taken together with the contemporary global view, provides little option.
Ms Kumaratunga denounces the “crony capitalism” of her predecessor UNP administration and has even enacted special legislation to repossess some public sector undertakings sold by the previous government. She has promised transparency in continuing the privatisation process, but is confronted by determined resistance not from her political opponents but from her own friends and supporters as she moves towards partial privatisation of the Port of Colombo and some other public utilities like Sri Lanka Telecom and the Ceylon Electricity Board.
Though the journey is going to be along a tight rope, it is a trip that has to be made. President Kumaratunga has clearly made her choice and though the progress may be slower than she would wish, the direction has been, clearly charted.