Privatisation is not the only solution
- Agape International

Privatisation is often seen as a universal solution for productivity problems. State sector corporatisation model also works. The National Savings Bank's spectacular performance is evidence for that says Dr Shantha P Yahanpath, Principal of Agape International. State-owned enterprises can perform well with good leadership and effective corporate governance. I am not a proponent of total state ownership but privatisation is not a remedy for all corporate ailments says Dr Yahanpath. Joint ownership is also a good alternative for some state entities. Srilankan Airlines is a good example.

Agape International's Washington-based principal consultant, Mr Dean Lewis agrees. A veteran investment banker and ex IFC/World Bank staffer says corporatisation, for example, has worked well with state entities like New Zealand Post. Some organisations like New Zealand Post have become world class while using a corporatisation model. Lewis was the adviser to the New Zealand's architect of change under the labour government, Roger Douglas. "New Zealand Post was transformed from a $NZ 37 million a year loss-maker in 1987 to a NZ$75 million profit-maker in 1997 and was voted as the Best Managed New Zealand Company in 1995, five years after its corporatisation", Lewis noted.

For example, New Zealand experienced a wave of mergers, acquisitions and privatisation in the financial services sector to find that the country did not have a good vehicle for financial intermediation to the masses especially in rural New Zealand. Having sold Post Bank to ANZ Bank a decade ago the country launched Kiwi Bank that distributes banking services through Post Office branches. Post Bank also used Post Office branches for decades prior to the divestment by the government. The irony is that ANZ closed down hundreds of Post Bank branches after the acquisition and discontinued the service agreements with the post office. New Zealand witnessed the full cycle and found that private sector profit motives and social responsibility of financial intermediation have not blended well together. There is no need for Sri Lanka to go through the same cycle says Yahanpath. There are some strategic enterprises that can contribute to the socio-economic development through state ownership, corporatisation or joint ownership. Central to the debate is the difference between pure economic development and socio-economic development. Yahanpath was a strategist with ANZ Bank during the acquisition of Post Bank and says dual branding and duplicity of branch networks do not work.

Lessons from NSB

Good leadership and effective corporate governance can derive quality profits in state-owned enterprises while serving the masses in a socially responsible manner. State-owned institutions like NSB can assist development in a number of ways.

1. Taking up a significant portion of government debt eg. deficit funding
2. Efficient savings mobilisation
3. Lending to infrastructure and housing development (eg. Dahasak Wev or 1000 irrigation tanks programme)
4. Delivering a "reasonable" dividend to the government

Based on the 2003 Annual report the NSB appears to have delivered all of the above and the highest corporate profits recorded by any Sri Lankan financial institution. This is not only a spectacular achievement by domestic benchmarks but also augurs well with international benchmarks when we look at the key performance indicators says Yahanpath.

Performance Indicators

Profit Growth*

  1994 2003 % INCREASE
NSB 75 3534 4611
HNB 443 1008 127
Commercial Bank 142 1477 940

(*) after tax in Rs. Millions

NSB's profit growth of 4611% during the 10-year period is outstanding especially when we take into account HNB's 2003 profit was largely attributable to the trading profits of investment portfolio.

Cost to Income Ratio

  1994 2003 % INCREASE
NSB 88.45 36.94 58.24
HNB 56.79 63.79 -12.33
Commercial Bank 59.85 55.87 6.65

Cost to income ratio is a good indicator of corporate performance in general and in banking sector in particular. As a state institution NSB appears to have reduced this ratio well compared to its private sector peers thanks to good leadership and a continuous focus on cost structure.

While acknowledging that NSB is primarily a savings bank with a medium risk loan portfolio, there are still "lessons of experience" for other state sector and private sector banks. Therefore, privatisation is not the solution for all corporate ailments but good leadership, cost management and corporate governance are, says Yahanpath.

Dr Shantha P Yahanpath Mr Dean Lewis
Principal, Agape International Consultant, Agape International
Corporate Advisors 4933 East Chalk Point Road
P O Box 2174 West River, MD 20778

Wahroonga, NSW 2076 Washington
Australia USA
[email protected] Email. [email protected]
Tel. +61 438 873552 Tel. +1 301 5201113



Copyright 1997-2004 www.lankaweb.Com Newspapers Ltd. All rights reserved.
Reproduction In Whole Or In Part Without Express Permission is Prohibited.