As early as the 1920s the former government of Ceylon explored the possibilities of engaging in entrepreneurial activities but decided against participating directly in such commercial ventures. This policy continued throughout the 1930s, but the absence of credit facilities for local entrepreneurs eventually influenced the government to establish the Bank of Ceylon in 1939 with partial funding from the state. Also, it was not until the war years of the early 1940s that a number of commercial undertakings were established by the government for the manufacture of basic essentials such as medical supplies, paper, plywood and for the purchase and distribution of food supplies. As many of these undertakings proved to be uneconomic and failed financially, further investment in their commercial activities was discontinued. Instead, in the post independence era from 1947 government efforts were directed to encourage private sector involvement in the economic development of the new Republic of Sri Lanka.
The promulgation of the State Industrial Corporations Act in 1957 and the availability of foreign aid for public manufacturing industries saw the expansion of public enterprises in Sri Lanka. It was explicit government policy that basic strategic industries - such as power, iron and steel, transport, insurance and petroleum -should be owned and controlled by the government. Secondary level industries -including those dealing with textiles, ceramics and leather goods - were opened to joint state and private enterprise participation.
The purpose of concentrating more and more resources in a wide range of state controlled and directed economic activities was mainly to promote sustained growth and development, provide more employment, raise living standards of the people, foster national self-sufficiency, and provide a climate for stability in price levels . Public enterprises have expanded rapidly since national independence to achieve these socio-economic objectives. Prior to 1957 there were only 10 public enterprises. The numbers increased to 34 during the next decade and totalled 77 in 1975. By the end of 1985 there were 284 public enterprises.
Sri Lanka has three organisational forms of public enterprise - the departmental undertakings (77), statutory corporations (164) which includes companies vested in the Government (43). Departmental undertakings such as the Sri Lanka Government Railways, the Posts and Telecommunications Department and the Marketing Department are commercial enterprises but operate in the same way as any other government department within a Ministry. Departmental undertakings are financed from advance accounts (trading funds) approved by Parliament and are subject to the normal rules and regulations applicable to government departments. The accounting, however, is on a commercial basis.
Corporations and companies were established as distinct legal entities, free from rigid bureaucratic control. These bodies were intended to compete with those in the private sector, and foster the development of entrepreneurial skills in enterprise management. Corporations may be established in two different ways:
Government companies are established under the Companies Act and may be owned wholly or in partnership with other public or private enterprises. Holding companies may also be set up by these companies or by statutory corporations. Some government companies also owe their existence to takeover bids by the government under the Business Acquisition Act of 1971.
The departmental undertaking is organised as a major division of a Ministry and is directly controlled by the Ministry. The Head is appointed by Cabinet and the staff are all public servants. Management in a public corporation, however, is by a Board of Directors appointed by the Minister. The Boards generally include Treasury representatives and qualified persons from the professions such as accountancy and law.
Boards of Directors of government companies are appointed by the Minister, and by the shareholders in the case of joint ownership in accordance with the provisions of the Memorandum and Articles of Association. Businesses acquired under the Business Acquisition Act are managed by a government official called a "Competent Authority" who is appointed by the appropriate Minister. Boards of Directors which are responsible to their Ministers, have considerable autonomy in the management of the affairs of their enterprises within the framework of government policies. Government companies operate free from restrictions in the same way as other companies.
Appointments in departmental undertakings, as in other government departments, are made by the Ministry of Public Administration but are ultimately subject to the supervision and control of Cabinet. Staff are engaged on a permanent basis and are eligible for transfer to other government departments. Appointments to the executive grades in the various corporations require ministerial approval, but other staff appointments are by the board. Some staff are obtained on secondment from government departments, or on contract. Boards of directors in government companies are free to select their own staff in common with other companies.
There is generally a scarcity of qualified accountants and financial managers in the public sector. This may be attributed to less attractive terms of employment prevailing in the public enterprises sector than in the private sector.
As there are no specialised training institutes or training programmes for personnel of public undertakings, skills tend to be acquired through practical job experience. There are no restrictions on the movement of staff between corporations and between companies, which helps reduce staff attrition to the private sector.
Public enterprises in Sri Lanka derive funds from three main sources -internal revenue, grants and subsidies, and borrowings. Additionally, government assets may be transferred to corporations as a supplementary form of financing.
Most departmental undertakings are unable to generate sufficient revenue to meet operating costs. Some of these undertakings, in addition to normal budgetary appropriations, which are invariably exceeded without authority, receive specific additional allocations authorised by Parliament. Others, however, do not receive these supplementary funds and, consequently, continue to incur deficits.
In view of this parliamentary supplementation, departmental undertakings may be classified as subsidised and unsubsidised enterprises. Some unsub-sidised enterprises are in deficit but may not, for various reasons, qualify for assistance. The subsidies given are mainly to alleviate losses and the relevant amounts are required to be disclosed specifically in the accounts. Exemptions from payment of taxes also represent an indirect form of subsidy.
Departmental undertakings are generally able to fix their rates, fees and product prices. However certain items are controlled arbitrarily within the framework of the pricing policy determined by the supervising Ministry and the Planning Ministry.
Statutory corporations are required to indicate in their annual budgets the projected contribution to public revenue as a return on the investment of the government. Few are able to achieve the targets they set. Corporations may also borrow with the approval of the appropriate Minister and with the concurrence of the Ministers of Finance and of Planning up to limits authorised by them.
Foreign borrowings are negotiated through the government. Domestic loans are usually obtained at market interest rates, but foreign loans are often secured at nominal interest rates or even interest free. The government normally underwrites all loans but, in some cases, loan repayments in default are converted to equity holdings in favour of the lenders.
Government investment in companies is solely for the purpose of exercising control in matters relating to national policies. Private sector investment in government companies is encouraged because of the inflow of capital in addition to considerations of corporate expertise.
With the exception of government-owned companies, public enterprises are required to deposit surplus funds in the Treasury - unless specific approval has been obtained for investing these funds elsewhere. The government does not specify a rate of return on capital employed but, as a minimum, all corporations are expected to break even over a period of five years. Where corporations have been incurring continuous losses, only Cabinet can decide to have the corporations wound up. The government would then take over all assets and be responsible for their liabilities. Unprofitable companies are wound up according to the requirements of the Companies Act.
Public enterprises in Sri Lanka have been established to facilitate social and economic development and generate revenues for the State. Government control over these enterprises is recognised as essential for ensuring their accountability. For public corporations, the major form of public enterprises, government control is provided in the Constitution and other statutes such as the Finance Act of 1971.
The extent of ministerial control depends on the nature of the particular public enterprise involved. Departmental undertakings are supervised by the Minister concerned in the same way as other departmental responsibilities. Ministerial control over government companies established is minimal. The relevant Minister has the power to supervise and control the affairs of statutory corporations by the issue of specific and general directions. He has also the constitutional power to appoint statutory auditors and obtain audit reports, apart from the audit by the Auditor-General of Sri Lanka.
The power of the Minister extends to:
Government companies established under the Companies Act are not subject to any central agency control. Such controls over other forms of public enterprises are:
Post-1970 developments in Sri Lanka were marked by measures designed for closer control of government over public enterprises to enhance their accountability. Government control pervades all activities of public enterprises, thereby restricting their autonomy. Public corporations are free from Public Service rules but are governed by a series of other control measures imposed by the government in matters such as the maximum salaries payable to executives and provision of free transport. As indicated previously, even in the fixing of prices of their output, Dublic enterprises are subject to restrictions.
In Sri Lanka public enterprises, other than companies established under companies legislation, have to comply with directives issued by government and have limited operational flexibility.
Companies established under companies legislation and public corporations other than acquired or vested undertakings are managed by a Board of Directors in their management. The management of an acquired or vested undertaking, which had been established with private capital but acquired by government under the Business Acquisition Act of 1971, is entrusted to a Competent Authority appointed by the responsible Minister.
The Boards of Directors of public corporations and wholly-owned government companies are appointed by the responsible Minister. In respect of other companies, the Board is appointed by the shareholders. A Treasury representative is generally included on the boards of public corporations.
The various boards have powers to approve the rules and regulations governing the day-to-day administration of the enterprises. While the boards of companies enjoy complete financial autonomy, those of corporations have no financial powers connected with investment, borrowings and capital expenditure beyond a specified amount.
Public enterprises in Sri Lanka have management information systems which are in some cases computerised.
Public enterprises other than departmental undertakings follow the accounting principles and standards prescribed by the Institute of Chartered Accountants of Sri Lanka. Departmental undertakings comply with the accounting procedures laid down by the Treasury.
Three parliamentary committees viz the Public Accounts Committee, Public Enterprises Committee and Consultative Committee of Parliament examine the operations of public enterprises and consider the audit reports on them submitted by the SAL The Committee of Public Enterprises, which also undertakes a review of the progress of public corporations on a concurrent basis, is empowered to examine representatives of enterprise management, the respective ministries involved and the Treasury - and make recommendations wherever necessary.
All three committees can visit enterprises at their discretion, and are free to make indepth studies. None of the investigations by the committees is open to the public.
Apart from the activities of these committees, the Parliament in Sri Lanka does not exercise any direct budgetary control over individual enterprises. Further, there are no specific legislatural controls over borrowings of public enterprises.
The Auditor-General of Sri Lanka, as the Supreme Audit Institution (SAI), is the external auditor of all public corporations and business undertakings vested in the government. The authority of the SAI for these forms of public enterprise is derived from the Constitution of the Democratic Socialist Republic of Sri Lanka and the auditing mandate is amplified by specific legislation in the form of the Finance Act of 1971.
The SAI does not act as consultant or adviser to the management of public enterprises. Suggestions for improvement and related issues may be made informally by the SAI during the CQurse of his audit, but individual managements are responsible ultimately for initiating, implementing and maintaining any consequential changes. Further, the internal audit programmes of public corporations are settled in agreement with the SAI. Management is also assisted by the obligation of the SAI to provide the enterprise with detailed observations on the audit of each corporation before giving his opinion.
The SAI has no authority to correct decisions of management or to give instructions to management. Deficiencies in the management of departmental undertakings and public corporations may be corrected by the particular entity itself, or if necessary, by direct ministerial or Cabinet intervention.
Under the provisions of the Constitution and Finance Act the SAI undertakes a comprehensive review and examination of the accounts, finances, management and property of all public enterprises in the form of departmental undertakings, public corporations, statutory boards and bodies, but other forms of public enterprise are not covered by this mandate. The review and examination of public enterprises by the SAI comprise:
The involvement of the SAI in the affairs of public enterprises, as recognised by the Constitution and Finance Act, extends to all aspects of their activities and concurrent management matters. Public corporations are required to formulate a corporate plan covering a period of five years and an annual budget at least three months before the commencement of each financial year. Individual corporations are obliged to conform to certain formats determined by the relevant Minister in charge in addition to the Minister of Finance in the formulation of the corporate plan and the annual budget. The SAI in fact does review the format and compliance with it as an ex-ante operational exercise. The second stage involves the concurrent review by the SAI of activities with an appraisal of the efficiency and adequacy of the books, records and documents required to be maintained in such form, manner and design as approved by the relevant authorities and the rendering of accounting, financial and statistical information relating to both financial and physical performance which are an integral part of the examination and evaluation by the SAI.
In the role of external auditor of public enterprises (but not of government owned or controlled companies), the SAI is authorised under the relevant provisions of the Constitution and Finance Act to ascertain:
These specific objectives enlarge the scope of the audit beyond regularity and compliance. Not only is financial performance appraised, but also non-financial performance. The appraisal of financial performance is the recurrent annual attest function designed to express an opinion on the financial statements, while the appraisal of the non-financial performance involves indepth investigative studies of economy, efficiency and effectiveness.
The Finance Act requires the SAI to undertake both the financial and non-financial appraisals annually as an attest function. Because resource constraints do not allow detailed recurrent non-financial appraisals to be carried out, the SAI has adopted a modified approach in this area to satisfy the statutory requirement and the practicability of the appraisals. This approach involves a brief annual examination of performance aspects such as profitability, capacity use, labour productivity, uneconomic expenditure and deficiencies in systems and controls, in conjunction with cyclical indepth studies of activities and operations of individual entities.
With the exception of government owned and controlled companies, there are statutory requirements for public enterprises to have an internal audit function. The authority for the internal audit function of departmental undertakings is the Government Financial Regulations, while the Finance Act obliges public corporations to settle their minimum audit programme in agreement with the SAL
Although there is specific regulatory or statutory provision for the internal audit of these forms of public enterprise, in practice the internal audit function has not proved effective, with the result that greater reliance is placed on the external audit conducted by the SAI. Deficiencies and weaknesses in the internal audits of individual enterprises are reported regularly by the SAI in his annual report to the Parliament.
Public enterprises in Sri Lanka do not commonly have audit committees to advise on internal auditing procedures and generally oversee the internal auditing function. Further, commercial auditors are not engaged to perform the internal audit function of departmental undertakings but there are a few instances among public corporations where commercial auditors are engaged in such a capacity.
The SAI has the constitutional power to engage commercial auditors on contract for the external audit of both departmental undertakings and public corporations. Although this power has not yet been exercised in the case of departmental undertakings, which are consequently audited directly by the SAI, commercial auditors have been, involved with the external audit of public corporations. In these latter cases, commercial auditors conduct their audits as agents of the SAI. They are subject to the direction and control of the SAI and report directly to him on the corporations audited. However, the statutory audit report on these corporations is issued by the SAI in his own right.
Departmental undertakings are now empowered to appoint a commercial auditor rather than be subject to audit by the SAI. In contrast, public corporations have this power, subject to the statutory audit being conducted by the SAI. The commercial auditor in these cases is not restricted to compliance or regularity audits. Performance audits may also be undertaken by virtue of individual corporations having discretionary power over the scope of their audits.
Where government owned or controlled companies are involved, the SAI has no jurisdiction because these entities have the legal right under the relevant companies legislation to appoint their own auditors. As such enterprises with government participation in their capital fundings are deemed to be private sector organisations, any form of parliamentary control over their affairs is excluded. Therefore, the scope for involvement by the SAI is limited to a review and evaluation of the investment made by the government and the appraisal of any returns on that investment.
The principal audit methodology employed by the SAI is a mixture of systems-based and transactions audits. In financial audits, geared to cover regularity aspects in order to form an opinion on the annual accounts, the SAI is mainly concerned with the authority underlying individual transactions, their genuineness, value received and the accounting principles involved. In the process, vouching, review techniques and physical observations are employed. These audit operations are undertaken by sampling techniques, essentially after the event except for physical observations which occur on a current basis to cover such matters as the verification of assets and liabilities.
Although a special staffing group, viz the Public Enterprises Division of the General Treasury, is responsible for controlling and directing the general operations of all public corporations, statutory boards, government owned business undertakings and advance account activities, no such specialisation exists in the organisational management of the SAI. Within the SAI, audits are distributed on a sectoral basis such as Health, labour Finance, Industry and Agriculture.
Specific audit guidelines are issued by the SAI for such audits, mainly reporting formats. Specially trained and qualified staff are not engaged on the audit of public enterprises, because all audit staff belong to a generalist group with an accountancy orientation.
As the SAI is required to make a management report to the enterprise concerned within eight months of the close of the financial year, and the statutory report to the Parliament within ten months of the close, the time horizon of audits is determined by these dates. In general terms, audits are scheduled so that they are completed within seven months.
In the case of larger enterprises, the audit staff of the SAI are permanently located at the headquarters of the particular enterprise to facilitate the conduct of continuous audits. Surprise visits are made to decentralised units from time to time. With medium-size enterprises, where the volume of work is not as great, the audit staff of the SAI make periodic visit to conduct interim audits. The timing of these visits mainly depends on the progress of the accounting work in the particular enterprise. The audit by the SAI of small enterprises, where the volume of work is much less, does not commence until the signed financial statements are received.
In addition, non-financial or performance audits of selected areas are carried out at the discretion of the SAI on an ad hoc basis. Reports on these audits are also transmitted to the individual managements concerned and included in the annual report of the SAI to the Parliament.
While the enabling statutes of individual enterprises contain a general provision for an audit report containing an opinion on the accounts, the specific reporting obligations of the SAI are governed by both the Constitution and Finance Act. The Constitution requires the SAI to submit an annual report to the legislature within ten months of the close of the financial year. This statutory report covers the exercise of the functions of the SAI for that particular year.
The Finance Act specifies two additional reports by the SAI, one containing detailed audit observations for management and the other for publication with the audited accounts. As indicated previously, the first report under the Finance Act, which is not for publication, is submitted to the management of the enterprise concerned within eight months of the close of the financial year. This report informs management of any deficiencies observed during the course of the audit. The board of directors is required to study the report in detail, issue necessary directions to management and advise the SAI within three months of corrective steps taken by management. The second report of the SAI under the Finance Act, which is for publication with the annual accounts, is submitted to management within ten months of the close of the financial year.
A time limit is also placed on the annual reports of the public enterprises themselves. The Finance Act requires annual accounts to be submitted within four months after the close of the financial year to the appropriate Minister, Minister of Finance and the SAI. As noted, the SAI is then required within a further four months to submit a report to the management of the audited enterprise, and his audit opinion on the accounts within ten months after the close of the financial year.
In addition to management reports, the SAI may make a detailed report on any enterprise to the Minister concerned and to the Head of Government. Such reports may contain material not reported elsewhere or tabled in the Parliament with the statutory report of the SAI.
The audit findings and reports of the SAI on public enterprises are utilised by the ministries concerned and the legislature. The Board of Directors of each corporation is required to scrutinise the detailed report of the SAI and furnish a reply to the SAI indicating the action taken on each of the matters raised. Individual corporations are also required to publish the audit report of the SAI, together with the annual accounts and report of the board of directors.
Further, the audit report of the SAI, annual accounts of the corporation and report of the board of directors are tabled in the legislature where they are examined by the Committee on Public Enterprises. This select committee of the Parliament may, at its discretion, conduct hearings into the reports tabled. At such a hearing, witnesses from the management of the particular enterprise, the Ministry concerned, and the Treasury may be required to give evidence. Where necessary, the Committee on Public Enterprises makes appropriate recommendations.
The form of the financial statements of public enterprises in Sri Lanka is not subject to the approval of the SAI. The relevant authority external to managemerit for such approval is the Treasury, in terms of the powers vested in the Minister of Finance by the Finance Act.
Similarly, the SAI does not participate in the preparation of the financial statements of public enterprises. This function is the sole responsibility of the individual enterprise concerned.
In the context of Sri Lanka's experience of public enterprises over the last three decades, the following major issues remain to be resolved:
(i) Central Control Over Financial Management
The development of public enterprises in Sri Lanka has not been accompanied by any central control over their financial management, as is the case with government departments which are subject to Treasury control. Even in regard to the relevant provisions of the Finance Act, there, is no central authority responsible for implementation, the controls exercised by Treasury are incidental to those of the Minister of Finance over investments, loans and grants to these enterprises. Treasury control therefore is not mandatory, not concurrent and not complete.
There are other defects in the current system of central control over the financial management of public enterprises. Ministerial control has not been adequately defined and structured, while the audit of the SAI is necessarily after-the-event and mainly a reporting function. As the SAI has no powers to give directives of any type to entities, external control over individual enterprises is further limited.
(ii) Accountability for Socio-Economic Results
The accountability statements rendered by public enterprises in Sri Lanka are confined to annual financial statements and reports of the board of directors. The primary focus is on financial operations but there is no adequate coverage of socio-economic aspects. In view of the fact that some of the enterprises involved are subsidised entities with socio-economic mandates, it would appear desirable that such entities should furnish statements of socio-economic results in conjunction with their annual accounts, both subject to review by the SAI.
(iii) Accountability of Subsidiaries
Subsidiary companies, partly or completely owned by public corporations, currently fall outside the control of a Minister, Finance Act, Treasury and the SAI. These subsidiaries are thus free from accountability to the legislature in any way. Once again, it would appear desirable that subsidiaries be subject to minimum specified controls of the SAI.