For a country crippled by bloody civil war, Sri Lanka has seen dramatic progress in privatization over the last three years. Even as bombs blew up the heart of Colombo’s business district in October 1997 – an area housing the central bank, the Colombo stock exchange, the Securities Exchange Commission and the Bank of Ceylon – the country earned record revenues from privatization. The sale of the country’s telecom monopoly, its second-largest development bank, half a dozen small state companies and several plantation companies, raised SLR22.5 billion ($336 million) in 1997, contributing 11.5% of total government revenue. The budget deficit for 1997 fell to 7.9% from 9.4% in the previous year, no mean achievement for a country that spends around 5% of its GDP on security.
Last year the steady gains continued, despite a depressed stock market that was rocked first by the east Asian crisis and then by the Russian meltdown. Five offers of sale of government shares in tea and rubber plantation companies were oversubscribed and raised SLR239 million. Some 13 of the 23 regional plantation companies are now listed on the Colombo stock exchange and six more are expected to float this year. This key sector accounts for 5% of Sri Lankan GDP and is its largest foreign-exchange earner. The government has gone for a common formula of divestment in all plantation companies: it sells a 51% stake to a strategic investor, 20% to the public on the Colombo stock exchange, it distributes 10% to employees and retains a golden share for itself. As a result, shares in plantation companies are now widely held and actively traded by small investors on the stock market.
The setting up of a thoroughly modern exchange, where trading is online and paperless, is important for the success of privatization, says Hiran Mendis, director-general of the Colombo stock exchange. He adds that “in turn privatization has brought considerable gains to the stock market”. Panduka Ambanpola, head of research at Jardine Fleming in Colombo, explains: “Privatization has boosted market capitalization by bringing new listings and improving the profitability of companies. It may, however, have also increased volatility as more commodity stocks have been added.”
The stock market expects a major boost when shares of Sri Lanka Telecom are listed on the exchange. “SLT is expected to add a market capitalization of $1 billion to the current market capitalization of $1.5 billion,” Ambanpola points out. The sale of a 35% stake in Sri Lanka Telecom to Japanese telecoms company Nippon Telegraph and Telephone Corporation in August 1997, in a deal worth $225 million, is widely regarded as one of the country’s most successful privatizations. The government is to offload a further 10% stake onto the stock market by next year.
Another milestone achieved last year was the sale of a 40% stake in Air Lanka to the foreign airline, Emirates. The deal, brokered by Chase Manhattan Bank, brought in $70 million.
A measure of the success of Sri Lanka’s privatization programme is the fact that vital sectors of the economy – like telecoms, aviation, steel, plantations and gas – have been privatized with little political controversy. “There is a good feeling about privatization, as the gains are apparent to all,” says Mahinda Ambahera, senior manager at the Securities Exchange Commission. Consumers have gained from improved basic services (telephones, and gas for cooking, are now freely available), jobs have been protected and small investors have made money on the stock market.
Much of the credit for this goes to the political pragmatism of the government under president Chandrika Kumaratunga. Soon after coming to power in 1994, she set up the Public Enterprises Reform Commission to oversee public sector divestment and reform. The commission has been adept at combining the short-term need to maximize revenue through the sale of assets, with the longer-term goals of bringing new capital, technology and expertise to the inefficient public sector and of developing a vibrant stock market. It grapples with tricky issues like phasing out consumer subsidies without exposing the government to the political costs.
For instance, a five-year monopoly of the distribution of gas for cooking was given to Shell Gas when it bought a 51% stake in state-owned Colombo Gas in 1995. This ends next year, when the market will be opened up to other private companies. The monopoly was meant to protect consumers from a sudden spurt in price rises by allowing the subsidy on gas prices to be phased out gradually.
“There is still some price-catching to be done to bring prices close to cost. We are setting up a regulatory body that will promote competition, regulate prices and protect consumer interests. Legislation for the new Consumer Protection Authority is expected to be passed in parliament soon,” says Mano Tittawella, director-general of the Public Enterprises Reform Commission. Sri Lanka Telecom employed a similar five-year monopoly, to phase out a tariff system that uses international calls to subsidize local ones.
The government will need to be on its toes to avoid the potential pitfalls of the subsidy phase-out, particularly given that it faces crucial regional elections in April and a general election next year. The privatization of the two giant state banks and the insurance sector will also be politically challenging. So far the government has ruled out the privatization of the State Bank of Ceylon and the Peoples Bank, which together hold a 60% market share. They are an important source of cheap funds for the government, particularly for its defence companies. The legal hurdle to the opening up of the insurance sector, meanwhile, has yet to be cleared by parliament.
Next in line are three sugar plantations, with the government seeking strategic partners. “We are in advanced negotiations in one case which should be closed in the next six weeks,” says Tittawella. “We are also helping in the effort to bring in private investment into infrastructure sectors like water and electricity. These will be more in the nature of reform rather than privatization,” he adds. A deal with a consortium led by P&O Australia to develop the Colombo port will also be signed soon. Kala Rao
