Letters to a Sri Lankan Cabinet Minister on management

Letters to a Sri Lankan Cabinet Minister on management

The responeses to these letters are omitted for confidendiality

12 December 2011

Hon. D.E.W. Gunasekera, MP

Minister of Human Resources

128 Beddagana Road

Pita Kotte, SRI LANKA.

COPE Report:  Under-Performing Public Enterprises in Sri Lanka

Background

The recent report of the parliamentary Committee on Public Enterprises (COPE) that 40 public enterprises (PEs) are under-performing is nothing new. PEs in Sri Lanka have been
under-performing since independence because of poor management, external political pressures and lack of formal oversight. Having been at one time one of the country’s most successful CEOs of a PE, and also as an international consultant and lecturer on public enterprise management for two decades working for the World Bank and United Nations Industrial Development Organisation (UNIDO) in 26 countries, I feel I can provide some gratuitous comments on this subject that could be useful.

I was Chairman/Managing Director of the State Timber Corporation (STC) from 1979 to end 1981, on leave of absence from Lever Brothers where I was Head of Marketing Department. When I took over, there was a lot of labour unrest and the corporation had only a turnover of Rs.60 million and had never made a profit but was getting subsidies from the government. Within 6 months it was making profits and when I left in 3 years the turnover was Rs.325 million and the profit after tax was Rs.125 million. Because of good
management systems, the STC continued to expand over the next 5 years to a turnover of around Rs.850 million. Each year, during my tenure, employees’ salaries were increased by around 30% and the corporation’s royalty payment to the Treasury was increased from 10% of turnover to 20%. When I left the corporation had no debts and Rs.90 million in fixed bank deposits. This work gained international recognition when Harvard Business
School made it a case study and the Asian Wall Street Journal ran two articles about this (copies available).

In early 1980, Hon. Gamini Dissanayake, who was the Minister of Lands & Land Development, told me: “Kenneth, your organisation is the only one that is well managed in my ministry. I would like you to conduct some training for the heads of the other public departments and enterprises in the ministry.” I told him that was not feasible as I was an
outsider in the ministry and the very senior public officers in ministry would resent my advisory role. Instead, I offered to bring in an Indian consulting team from the Indian Institute of Management, Ahmedabad, with whom I had connections, and work with them. The minister agreed that Indian consultants would have a much better understanding of the local situation unlike Westerners (Later, I was for three years an external lecturer on public enterprise management at this institute.) The whole project was paid for by the State Timber Corporation in the absence of a state budget allocation.

Outline of management development project

The project had two components. The consulting team first carried out a quick assessment of each enterprise to produce a diagnostic of the principal shortcomings facing the enterprises. Then we organised a seminar for the Chairmen, Managing Directors and General Managers on the elements of corporate planning, which was held at the Queen’s Hotel, Kandy. Up to then, planning was a spurious exercise based on unsubstantiated financial projections by the Chief Accountants. Based on this training, formats were issued to each department/enterprise to prepare a corporate plan extending from the current
year for the next five years. Consultants sat with the top managers of all the departments/ enterprises to guide them through the preparation.

The corporate plans included detailed implementation programmes to achieve monthly and annual performance targets in areas of production, marketing, finance, research, new product/project development, personnel development, etc.

Once the plans were submitted to the ministry and approved, a performance monitoring unit was established at the ministry. The ministry trained and appointed an Additional Secretary of the Lands Ministry as head of planning & monitoring. Every department/ enterprise had to submit a tabulated form indicating performances against targets for the past month which had to reach the Planning Unit within 10 days after the end of the
month. By mid-month, the performances of each enterprise was evaluated at a meeting presided over by the minister himself. As the chart for each organisation was put up, the CEO of the organisation was asked to come up and explain the variances. If the targets were achieved, no comment was required. If they were not achieved, the minister would make some harsh comments and ask how improvements could be made in future. Incidentally, this review meeting was a copy of the same type of monthly performance review I had established earlier at the State Timber Corporation.

This system worked extremely well for about 8 months. At that point, the minister handed over the task of chairing the review meetings to the Permanent Secretary at the time (my colleague at the university and namesake), claiming he had political work to attend to. The system quickly broke down as the Secretary was unable to maintain discipline and participating members gradually kept away from the review meetings. Due to lack of will, the whole system fell into disuse.

Basic requirements for PE management

The oft repeated theory that the private sector can manage better than the public sector is ideologically based and blatantly untrue. Even here in the US, public sector departments like the Social Security, Medicare, Post Office, are better managed than many private sector companies and provide more efficient services at a lower cost. PEs have failed in many developing countries as they are regarded as cash cows for politicians and so governments lack the will to create conditions for good management. At one time in the past in the 1980s, I calculated that the costs of subsidies to Sri Lankan PEs and their losses exceeded all the foreign aid that came into the country.

Granted that the political will now exists, there are three basic requirements for better PE management: 1) Selection of competent CEO and directors, 2) Formalised systems of management, which includes corporate plans, 3) Periodic formal performance oversight by the shareholder, the government.

Selection of Chair Persons & Directors

The appointment of political supporters without qualifications has often ensured that PEs are doomed to failure, even though they may have competent managers. Many UN consultants like us have advanced the idea of ensuring better PE boards of directors by establishing a List of Eminent Persons from whom these office bearers could be chosen. The government would advertise and call for persons with proven top management or professional experience to be included in the list and these would be vetted and approved by COPE. The supervising minister will then be able to exercise his choice but only from this list which has been approved. This will ensure that chairmen and directors of PEs are at least competent to do their job.

Formal management systems and performance review

All PEs must be compelled to prepare formal corporate plans for 5 year periods and submit these for approval to the supervising ministry. These ministries must also have a performance review department that is qualified to evaluate these plans and approve them. Once approved, the board of directors must be held accountable for the results.
Periodic management review meetings must be held in the ministries to ensure
performance against targets. Ideally, this should be presided over by the Minister and his Permanent Secretary.

There are very good management training institutes in the public sector in Sri Lanka such as the NIBM and the SLIDA. Their services are under-utilised. Foreign aid programmes bring in Western consultants (I am speaking from experience as a retired World Bank and
UNIDO consultant) by-pass the local public sector management institutes and have tried to create new ones. PEs should be made to use these state institutions on a regular basis and seek their services for management development.

These are some brief thoughts. As I am retired, I am willing to expand on these ideas if necessary.

(Kenneth Abeywickrama)

 

09 May 2013

Hon. D.E.W. Gunasekera, MP

Minister of Human Resources

128 Beddagana Road

Pita Kotte, SRI LANKA.

GDP growth and economic prosperity in Sri Lanka

Permit me once again to write to you on some unanswered issues arising from your recent meeting with IMF officials which I followed with great interest in the Sri Lanka media. As a retired UN business consultant for two decades, and as Sri Lanka was the land of my birth, I feel an urge to refer to some of the issues.

You asked the IMF experts how it was that Sri Lanka was showing over 6% GDP growth when it is faced with hugely unprofitable public enterprises, increasing adverse balance of payments and sharply reduced government revenues. The answer is that GDP growth is not accurately indicative of real economic growth. This is explained in detail in a book titled Mis-measuring our Lives: Why GDP Doesn’t Add UP by three of the most eminent economists in the world: Nobel Laureate Joseph Stiglitz, Amartya Sen and Jean-Paul Fitoussi. GDP is calculated on the basis of private and public consumption as this is the only way of adding up the additional values that go into the production and sale of goods
and services. At the point of sale there is a receipt and these are reflected in the income tax statements of businesses. What is not receipted becomes part of the black economy.

This calculation does not take into account consumption which is not productive based on debt. In Sri  Lanka, a fair proportion of the GDP is public consumption. When the government spends on large infrastructure projectsand subsidises public enterprises with borrowed foreign funds, money is spent and adds to the GDP. Sri Lanka, I believe, has borrowed over $5.0 billion from China and the IMF, apart from Japan and the Asian Development Bank. But if the Hambantota port and Mattala airport are loss-making, like most of the giant public enterprises, the government will have to borrow more money, locally or abroad, to make debt repayments. The GDP will grow with the borrowings but the economy will be in decline till a breaking point is reached.

The other issue is the collection of tax revenues. Tax revenues are said to be about 11% of the government budget, largely because local billionaires and millionaires and influential public figures evade taxes. I have no answer to this as it is local political issue.

The question may well be asked: Why have so many enormous infrastructure projects failed to yield adequate revenues? Infrastructure development, after all, is a sine qua non for development. You may know the answers but my view is that massive projects are undertaken without proper scrutiny by people who have little knowledge of economics. Before a large project is begun there should be at least two stages of evaluation: a feasibility study by experts which should be studied and approved by the cabinet and then a detailed project proposal, also done by high-level experts, that is then studied and approved by the cabinet of ministers. At any of these stages, the cabinet can disapprove and cancel or send the proposal for further study. Cabinet members should have time to study proposals and should also get experts to help them in the evaluation.

The problems faced at one time by Dubai will illustrate what can happen. Some years back Dubai developed the most spectacular projects in the world and then, to the astonishment of investors, the country was bankrupt and couldn’t pay the contractors. But Dubai
is the financial hub of the oil-rich Gulf  States and was able to rebound. Sri Lanka does not have that advantage.

Debt based prosperity is illusory. The USA and the EU are facing the same problem. But they are in a different category as they have the international currencies that others use for trade and as Central Bank reserves.

Sincerely,

(Kenneth Abeywickrama)

 

 

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