Sri Lanka should only place state enterprises with pure commercial objectives in a planned holding company modelled after Singapore's Temasek, but should keep entities such as water and power out of it, economists said.
Sri Lanka's state enterprises are a big burden on the people, making large losses, stifling competition, being operated with special privileges, and state bank credit and budget support given by the elected ruling class using people's money.
State firms crowd out ordinary citizens in financial as well as real terms.
In the last 10 years, six state enterprises - Ceylon Petroleum Corporation, Ceylon Electricity Board, Sri Lankan Airlines, Mihin Air and Sri Lanka Transport Board - lost Rs605 billion, a report compiled by Advocata Institute, a think tank focusing on economic freedom, showed.
The losses eventually end up being covered by budgets, taking away resources that could have been spent on health or education.
In the three years to 2014, out of 55 non-financial public enterprises monitored by the Public Enterprise Department of the Treasury, 42 entities received a total of Rs215 billion in budget support.
Budget support climbed from Rs26.7 billion in 2012 to Rs123.2 billion in 2014. In 2014, Rs22 billion was for current spending.
Sri Lanka's current administration wants to set up a holding company modelled after Singapore's Temasek Holdings to improve the management of the enterprises and insulate them from political interference.
Rohan Samarajiva, a member of the advisory board of Advocata and who also heads regional think tank LirneAsia, said that while the best option to stop political interference and a negative fallout from state enterprises may be privatization, even less optimal solutions could bring big benefits to the people.
"In the real world, a policy win is the avoidance of the worst outcome," he said.
Eran Wickremereratne, Deputy Minister of Public Enterprises, said the challenge was to stop political interference in state enterprises.
Analysts say, unlike private shareholders, the elected ruling class who do business with taxes taken from the people using the coercive power of the state has no incentive to save money or make profits.
Their objectives are to spend money for votes and give jobs to supporters, making the incentives fundamentally against the interests of the overall community and the enterprise itself.
Razeen Sally, a professor at Lee Kwan Yew School of Public Policy at the National University of Singapore, said only entities with purely commercial objectives should be placed in the planned holding company.
Entities with mixed political and commercial objectives such as Ceylon Electricity Board should not be placed in such a holding company at the moment, Sally said.
In Singapore, entities like Singapore Airlines, Sembawan and Capital Land were in it. Such state enterprises were run profitably like private firms and were listed in the stock market subject to performance pressure.
Bhutan had a state investment company called Druk Holdings, but it had limited success, and there was no stock market to list shares unlike in Singapore, Samarajiva said.
Malaysia's Khazanah Holdings had some successful companies that were more insulated from political control, Sally said.
Although less than ideal, people should engage with the model, Samarajiva said.
A participant at the forum said it was puzzling why there was apparent resistance to privatization when the benefit of telecom privatization including the disappearance of waiting lists and superior service were clearly visible.
There were also additional evidence of Sri Lankan Airlines, which stalled after re-nationalization by the last regime and ran colossal losses.
Fixing state enterprises is difficult because of a feudal culture overlaid with Fabian thinking, Samarajiva said.
"It’s going to be a long game. Persistence based on principle is needed," he said.
Fabians were a group of British socialists who gave ideological support to the labour party. Other prevalent ideologies including Marxism and fascist-nationalism, which also came to Sri Lanka from Europe.