Corrupt Procurement Practices at SOEs Must Be Addressed with a Competitive Bidding Process

The Advocata Institute has called for immediate and decisive reforms to address the deep-seated corruption within State-Owned Enterprises (SOEs) procurement practices, particularly regarding the Ceylon Electricity Board (CEB) and its fuel purchasing.

For too long, the lack of transparent, competitive bidding processes has allowed corrupt practices to drive up fuel costs, directly contributing to increased electricity tariffs and imposing a heavy debt burden on the government.

By bypassing open bidding, the CEB has repeatedly acquired fuel at inflated prices, which, in turn, has forced the government into a cycle of costly bailouts to sustain the institution. These procurement inefficiencies highlight a broader issue across SOEs that must be addressed if Sri Lanka is to meet its anti-corruption and economic reform goals, says the The Advocata Institute

It said: “We commend President Anura Kumara Dissanayake’s engagement with the National Procurement Commission (NPC) to tackle this issue. However, establishing a transparent, competitive bidding framework is essential for reducing corruption and improving financial accountability within SOEs. Such a reform would help lower operational costs for the CEB and other SOEs and support the government’s vision for economic stability and sustainable growth.”

The Advocata Institute stands prepared to assist in these vital efforts to improve procurement integrity and help break the cycle of inefficiency and debt that has long held back Sri Lanka’s economic progress.

A full press release is as follows:

Recent rumors that the new government might grant the Ceylon Electricity Board (CEB) permission to continue to bypass competitive bidding for fuel purchases have sparked an uproar on social media.

While the validity of these reports is yet to be determined, the resulting online debate draws attention to an ongoing cycle of debt and loss that has plagued Sri Lanka’s State Owned Enterprises (SOEs) for decades.

As an economic policy think tank, the Advocata Institute strongly believes in introducing competitive procurement processes to the operations of SOEs to mitigate this problem.

Due to the lack of such guidelines within the institution, the CEB has been purchasing naphtha – used for generating electricity – from the Ceylon Petroleum Corporation (CPC) at prices higher than global market prices, effectively driving up the cost of electricity production and thereby driving up tariffs, much to the detriment of consumers.

CEB often delays payments to the CPC as a result of its inefficiencies, thereby racking up debt which is financed by borrowings from state banks such as People’s Bank or Bank of Ceylon or, in some cases, prompting the Government to absorb said debt into its own Balance Sheet. For example, in 2023, the Treasury injected Rs. 126.3 billion into the CEB to settle accumulated debt to the CPC and Independent Power Producers (Ministry of Finance Annual Report, 2023).

The CPC also similarly overcharges Sri Lankan Airlines (SLA) for jet fuel. Since fuel costs comprise a significant portion of the airline’s total expenditure, it is no surprise that higher fuel costs could lead to losses, which would again have to be financed through government assistance.

As per the Ministry of Finance Annual Report 2023, the Treasury infused additional equity capital of Rs.102.5 billion to SLA to settle an outstanding debt to CPC. This problem of circular debt is something the Advocata Institute has written extensively about.

The inefficiencies in procurement processes of State Owned Enterprises (SOEs) such as CEB and CPC affect other SOEs and consumers alike, with state banks having to lend depositors’ funds at disadvantageous rates and consumers being forced to pay higher tariffs while experiencing subpar services from loss-making SOEs. Debt cycles such as these also contribute to expanding the Treasury’s budget deficit, making this issue a national concern in more ways than one.

It is also important to note that inefficiencies such as those illustrated above have persisted in SOEs for a long time and have the potential to continue indefinitely if not addressed.

Establishing a competitive bidding process in all SOEs would automatically decrease room for corruption and improve transparency regarding procurement practices.

The IMF Governance Diagnostic Assessment report directly references SOEs not following a competitive bidding process and how that directly results in corrupt practices in procurement processes.

While SOEs have historically been considered a drain on public finance and prime environments for corruption due to lack of accountability and oversight, reforms have progressed at a snail’s pace, with some instances of specific reform processes being abandoned completely or even reversed. For example, the current government announced that it would abandon plans to privatize SriLankan Airlines, and an alternate reform path is yet unknown.

Similarly, there has been little follow-up on the new Electricity Bill approved by parliament in June 2024. This Bill included several essential reforms, including unbundling the CEB and opening up new opportunities for competition in Sri Lanka’s energy sector. These attempts join a long line of stalled SOE reforms spanning decades and question the likelihood of seeing progress in this area.

However, as reported by adaderana.lk, President Anura Kumara Dissanayake has recently engaged in discussion with the National Procurement Commission (NPC) on the importance of establishing more systematic procurement laws and procedures.

This is a sign that the government will focus on the issues brought about by inefficient procurement practices and attempt to mitigate them by introducing a competitive bidding process.

If so, it could be a considerable step towards breaking the cycle of debt among SOEs that has brought negative consequences for consumers and the overall national economy for many years.

As SOE procurement practices are a significant source of corruption, addressing this issue head-on and implementing a transparent and competitive bidding process aligns well with the anti-corruption promises of the current government.

As such, the Advocata Institute urges the government to prioritize implementing a competitive bidding process as the first step in bringing SOEs out of the cycle of debt and loss that has handicapped the Sri Lankan economy for so many years.