By Sri Lanka’s State Enterprise Reforms: A Necessary Change or Risky Intervention?
Sri Lanka is planning to list a state-owned holding company on the stock market and either merge or shut down other government agencies that are draining public funds, President Anura Kumara Dissanayake announced. While this move aims to improve efficiency and reduce financial waste, it must be approached cautiously to avoid excessive government intervention and unintended economic consequences.
Challenges of Restructuring State-Owned Enterprises
Many state-run corporations and agencies have become a financial burden. However, simply shutting them down or merging them without a proper strategy could lead to job losses, disruption of public services, and economic instability. A well-balanced approach is needed to ensure that reforms enhance efficiency without negatively impacting workers or essential government functions.
“We need a new way to manage them,” President Dissanayake stated at an economic forum organized by Sri Lanka’s Ceylon Chamber of Commerce. “The current system is failing and full of corruption, which is putting a strain on government finances. Instead of sticking to the old ways, we are ready to make structural changes.”
One proposal is to merge these agencies into a single holding company and sell shares on the stock market. While this could attract private investment and improve transparency, it also raises concerns. If the government retains excessive control over the holding company, inefficiencies may persist. A clear regulatory framework is necessary to ensure privatization results in genuine competition and improved services rather than shifting existing government inefficiencies into a new structure.
Lessons from East Asian Economies
Ceylon Chamber Chairman Duminda Hulangamuwa pointed out that Sri Lanka aims to follow the economic growth patterns of successful Southeast Asian nations. However, the key to their success has been structured and well-planned privatization efforts that prioritize market-driven operations rather than excessive government intervention.
For example, Vietnam has successfully grown by listing state-owned companies on the Hanoi and Ho Chi Minh Stock Exchange through a process called ‘equitization.’ The Vietnamese government functions as an investment manager rather than directly running these enterprises, ensuring that they operate under market principles.
However, past experiences show that government-led privatization can be problematic if not managed correctly. In 2011, Sri Lanka’s government expropriated private companies, damaging investor confidence. In contrast, Vietnam continued privatizing its banks, such as the Bank for Investment and Development (BIDV) and VietinBank, attracting international investors like Japan’s Mitsubishi UFJ Financial Group.
Another notable success is Vinamilk, a state-owned enterprise initially formed by nationalizing multinational firms like Nestlé and Friesland (Dutch Lady). Today, Vinamilk has grown into one of Vietnam’s top-performing businesses and has even expanded internationally, proving that well-planned privatization can create globally competitive companies.
Government’s Plan to Reduce Non-Essential Agencies
Meanwhile, President Dissanayake revealed that a committee under the Prime Minister’s Secretary is evaluating several non-commercial government agencies that are a financial burden to the state.
“There are too many agencies doing the same thing,” he explained. “Some were established to meet past needs. For example, the government created several construction companies when there were no strong private contractors. But now, private firms are efficient and capable. Do we still need government-run construction companies? We may have to shut some down, merge them, or change their roles.”
However, these decisions must be made carefully. Rapid privatization without proper regulation could lead to mass job losses, corruption in asset sales, and monopolies that hurt consumers. A structured transition plan is crucial to ensure that affected employees find new opportunities and that privatized companies operate with strong governance and accountability.
Sri Lanka’s Economic Recovery and Future Considerations
Sri Lanka is expected to grow by around 4% in 2025 as the economy recovers from its recent financial crisis. However, the country has experienced repeated economic downturns due to unstable monetary policies that have led to inflation and credit issues. If privatization is poorly managed, it could worsen existing problems rather than resolve them.
Cautious Approach
While restructuring Sri Lanka’s state-owned enterprises could ease financial strain, it must be handled with caution to prevent excessive government intervention and market disruptions. Learning from successful models in East Asia, Sri Lanka should focus on transparency, competition, and regulatory oversight to ensure privatization leads to sustainable economic benefits rather than short-term fixes.
A well-planned approach will be key to achieving long-term growth while minimizing social and economic disruptions. The government must carefully balance efficiency, economic stability, and public interest to ensure this transition benefits the country as a whole.
