Ownership, competition and regulation under privatization policy: the Sri Lankan experience

DOI10.1177/0020852307083463
Published date01 December 2007
Date01 December 2007
Subject MatterArticles
/tmp/tmp-17w23SgE7Z352E/input International
Review of
Administrative
Sciences
Ownership, competition and regulation under privatization
policy: the Sri Lankan experience
Asoka F. Balasooriya, Quamrul Alam and Ken Coghill
Abstract
In response to the global shift from command-based economies to market
economies, Sri Lanka liberalized its economy in 1977. Liberalization includes three
main components, i.e. institutional reforms, removal of barriers to market entry,
and creation of proper regulatory regimes. Privatization as one of the strategies
under liberalization, however, became the prominent policy adopted in the
second wave of liberalization that took place in Sri Lanka in the mid-1980s. This
was aimed at not only reducing the fiscal and administrative burdens of a large
public enterprise sector, but also to stimulate private sector development and to
inspire greater government accountability. The fundamentals for successful imple-
mentation were, however, the change in ownership, the designing of policies to
stimulate competition and changes in the regulatory regime with capable institu-
tions. This article explores and analyses the extent to which the prevailing socio-
political culture of the country has influenced these three dimensions of the
reforms that have taken place in the public utility sectors in Sri Lanka. It argues that
if any of the three dimensions of privatization – that is, ownership, competition
Asoka F. Balasooriya recently completed a PhD in the Department of Management of Monash
University. She is a civil servant in Sri Lanka currently reading for her PhD on liberalization of telecom-
munications sector and regulatory arrangements in Sri Lanka. Dr Quamrul Alam is a Senior Lecturer
in the Department of Management of Monash University and he teaches Strategic Management and
International Business and Management. His research interests include: international public adminis-
tration; public–private partnership; e-governance, internationalization of Australian businesses;
globalization; FDI, and strategic management issues. He has published extensively on public man-
agement, public–private partnerships and international business and has been a consultant for
public and private sector organizations in Australia and Bangladesh. Ken Coghill is Associate
Professor in the Department of Management of Monash University. He is also the Co-director,
Monash Governance Research Unit. His research interests are in governance, parliaments and other
legislatures, application of complex adaptive systems theory and fuzzy logic to socio-political govern-
ance and business–government relationships.
Copyright © 2007 IIAS, SAGE Publications (Los Angeles, London, New Delhi and Singapore)
Vol 73(4):611–628 [DOI:10.1177/0020852307083463]

612 International Review of Administrative Sciences 73(4)
and regulation – are not taken into serious consideration, the expected outcomes
would not be met. The arguments are built up under the same three pillars of
privatization using primary and secondary data. It also highlights the importance of
putting equal emphasis on all three dimensions of liberalization instead of pure
organizational reforms. However, successful implementation is also subject to the
availability of domestic conditions that are supportive of reforms.
Points for practitioners

Reforms in the public utility sectors in Sri Lanka since the early 1980s with
special reference to privatization policy have been dealt with.

The importance of paying equal attention to all three dimensions, i.e. owner-
ship, competition and regulation, is highlighted.

The consequences of privatization of two industries, i.e. gas industry and
telecommunications, are discussed in detail.

Sri Lanka has responded to the demands for reforms without creating a legal
and institutional framework and ignoring domestic conditions.
Keywords: developing countries, domestic conditions, institutional reforms,
liberalization, political interest, public utilities
Introduction
Many developing countries have introduced reform measures orientated to a
market-based economy in recent decades. The ideology was to reduce the role of
the state and to offer more opportunities for the private sector to deliver services to
the citizens. Such ‘liberalization’ involves three main components: organizational
reform of state-owned enterprises (SOEs), usually monopolies; removal of barriers to
market entry; and the creation of an explicit regulatory regime. This implies the
closure of inefficient firms, the restructuring of existing firms which required change
of ownership, and the entry of new firms. Policies aimed to stimulate competition,
and changed regulations to facilitate entry, exit, taxation and other variables influenc-
ing private sector decisions (Commander et al., 1999).
Liberalization and privatization are two separate processes. However, they are
often associated with each other and hence, in developing countries, privatization has
become a significant policy as a means of reducing state budgetary burdens (Smith
and Trebilcock, 2001) although there is also a debate about improving the efficiency
of state-owned organizations without privatization.
In Sri Lanka, despite many development efforts since independence in 1948, the
liberalization of the economy in 1977 was a remarkable turning point. The second
wave of reforms in the mid-1980s was a further significant step aimed at increased
private sector participation in economic activities. However, the focus of this article is
on the third phase, under which the privatization of public utilities took place.
This article examines and analyses the three dimensions of privatization, i.e.
ownership change, competition and regulation in relation to public utility sectors in Sri
Lanka, from a management point of view. The analysis is based on both primary data

Balasooriya et al. Privatization policy in Sri Lanka 613
collected through recently conducted semi-structured interviews with telecommuni-
cations sector stakeholders – senior government bureaucrats, telecommunications
operators, the regulator, and industry experts – and on secondary data. It mainly
focuses on the extent to which the prevailing socio-political culture of the country has
affected the change of ownership, the creation of competition and the establishment
of a proper regulatory regime. The first section is a general discussion on reforms,
with special reference to developing countries. The second section examines the
overall privatization programme in Sri Lanka. The third section argues that socio-
political relationships have influenced the effectiveness of reforms affecting
ownership, competition and regulation. It is followed by an examination comparing
achievements in the telecommunications and the gas industry.
Privatization in developing countries
The worldwide reform waves since the 1980s included a comprehensive list of
different but related initiatives (Hodge, 2000). The target was greater private sector
involvement in what had previously been state economic activities. This was mainly
aimed at resolving economic difficulties in developing countries such as growing
foreign debt, rising inflation, and widening current account and balance of payments
deficits. Perhaps most important was the widespread waste and inefficiency of SOEs
and their inability to adapt changing economic circumstances (Al-Obaidan, 2002). In
effect, the utility services such as energy production and distribution, telecommunica-
tions and gas are increasingly under private provision in developing countries.
Privatization has been one of the most prominent practices adopted by develop-
ing countries to introduce ‘marketization’ (Kikeri et al., 1994; Kikeri and Nellis, 2002).
Since the main blame for government failure was placed on the public enterprises
due to their poor performance during the 1960s–70s, they became the foremost
target area for reforms in order to reduce the role of the state. It was also pushed by
the international aid agencies (IAAs), following what was perceived to have been the
noticeable success of the United Kingdom reforms. Since the 1980s, well over
US$1 trillion worth of state-owned firms have been privatized. Although the largest
number of privatizations occurred in developing countries, almost two-thirds of the
privatization activity in terms of proceeds has taken place in high-income countries
(Brune et al., 2004).
The main economic argument for private sector participation is the concept of
‘efficiency’. According to Jackson and Price (1994: 7), private participation ‘would pro-
vide greater incentives for cost minimization; encourage more effective managerial
supervision; and stimulate greater employee efforts’ in addressing major problems
faced by developing countries. Others (Miller, 1997; Hodge, 2000; Hughes, 2003)
attempt to classify objectives into broader but substantially similar categories.
Nonetheless, one may suggest that market reforms in developing countries had no
clear-cut objectives. A broader picture of what is expected from privatization is
shown in Figure 1. Primarily, developing countries aim at raising capital sources in
order to reduce public debt. They have many secondary objectives such as: reduce
budget deficit; secure eligibility for external support; increase efficiency of SOEs;
increase competition; encourage mobilization of private capital; support the ideology


614 International Review of Administrative Sciences 73(4)
Source: adapted from Piesse (undated).
Figure 1 Objectives and...

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