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Nationalization by stealth

The current Sri Lankan government made it clear from the start that it was opposed to the privatization of government owned enterprises. “The policy of the government was to retain ownership and management of ‘strategic’ enterprises such as state banks, electricity and utilities and make them profitable”, reported the Sunday Times, commenting on the government stance.

That making public enterprises profitable has been a difficult – if not impossible – task in the past has not stopped the government trying. As the Sunday Times report noted, “losses in public enterprises reached a record level last year and this year’s losses are likely to be larger”. But now the government has extended the policy further, moving from holding on to state enterprises to actively acquiring (privatizing) other ‘strategic’ enterprises to ‘manage them in the national interest’.

Thus, the buyback of 51% of Shell Gas Sri Lanka, which makes the Sri Lankan government 100% owners of the former, hopelessly inefficient, Colombo Gas Co, and the reacquisition of shares in the national airline SriLankan.

But the government has not stopped with buying shares in companies where current owners are looking to get out of the market. There has also “been a process of government gaining control of several key institutions through purchases of shareholdings and obtaining a controlling interest in them,” reported the Sunday Times.

“A notable example was the purchase of shares of the NDB Bank by several public institutions to become the main combined shareholder. This, despite the Banking Act that prohibits any one company or group holding more than 25 per cent of the shares of a bank. Government institutions as a group probably now hold about 40 per cent of the shareholding of NDB Bank. The ownership is by state banks, EPF, ETF and Insurance Corporation. This led to a dispute about representation on the Board. In effect this amounts to the re-nationalization of the NDB Bank that was privatized more than a decade ago,” the paper reported.

Similarly, the paper reports on the renationalization of the Insurance Corporation, through which the former Apollo Hospital was acquired by the Sri Lankan government and has been rebranded Lanka Hospital.

“The government has recently purchased large shareholdings of private banks as well,” reported the Sunday Times, adding, that these moves “indicate that the government intends to own many key business enterprises.”

This reversal of a privatization policy begun in the 1970s has a number of implications for the country, as the Sunday Times points out.

Firstly, the cost of the operations put a strain on the financial resources of a country already stretched after the huge debts accumulated during the war against the Liberation Tigers. As the Sunday Times notes: “It may have to borrow domestically as well as use borrowed foreign funds. In either case it would increase the public debt.” Keeping in mind that debt servicing in 2009 was greater than the total revenue of the government, and that the government has just brought debt servicing to expensive, but affordable levels, this could be a significant strain.  This is not to mention the strain on the balance of payments of purchasing foreign shareholdings, as is the case with both Shell and Sri Lankan.

The Sunday Times also points to the adverse effects such nationalization schemes have on foreign investment, noting “there could once again be some uncertainty about the government’s policies towards the private sector,” which could lead to foreign investors being wary and preferring to invest in other countries where the nationalization risk is not as great. 

Many see the nationalization drive as an extension of the Sinhala nationalist vision, with the government seeing itself as a benevolent ruler acting as a shield between the people and the big bad capitalistic world. But even those who do not accept this interpretation, preferring to see this as a government consolidating political power by commanding a larger share of economic enterprises, agree that these moves will have an adverse impact on private investment in general and on foreign investment in particular.