Governments across the world have historically launched businesses to provide essential goods and services or to seed industries that the private sector was too small or too cautious to create. Over decades these state-owned enterprises, often called SOEs, became a major part of national economies. Some continue to serve vital purposes, but many drift into irrelevance or become costly burdens. Sri Lanka is now signalling that it will draw a line.
Industry and Entrepreneurship Development Minister Sunil Handunneththi recently stated that the government will liquidate 33 non-functional state-owned enterprises and focus on facilitation rather than operating businesses. His announcement is not a call for blanket privatisation. Instead it is a targeted move to close or merge institutions that have outlived their purpose. This policy marks a significant shift in how the Sri Lankan state views its economic role and provides a timely case study of why governments should step back from running businesses.
The Minister’s Message
Handunneththi’s remarks underline two key points. First, the state intends to identify and wind up 33 enterprises that are no longer functioning in any meaningful way. Second, the government will move from the role of operator to that of facilitator, focusing on creating an environment in which private enterprise can thrive. He stressed that this is not a wholesale sell-off of valuable public assets but a rational decision to remove entities that consume resources without delivering value.
Why Governments Often Struggle as Business Operators
- Inefficient use of public funds
When a government owns and operates commercial entities, the profits or losses of those enterprises feed directly into the public budget. Losses must be covered by taxpayers or public borrowing. Even break-even operations can tie up capital that might be better invested in public health, education or infrastructure. Liquidating dormant or unproductive entities frees resources for these essential services. - Weak incentives for performance
Unlike private companies that must compete to survive, SOEs often operate without the pressure of market discipline. Political considerations can override sound business judgment. Hiring decisions may be influenced by patronage, investment choices by electoral cycles, and pricing by populist concerns rather than cost recovery. Over time these distortions reduce efficiency and make it difficult for even well-intentioned managers to innovate. - Opportunity cost for government attention
Running businesses diverts time and expertise away from the government’s core responsibilities: creating laws, ensuring justice, providing national defence, and maintaining key infrastructure. Ministers and senior officials must spend hours managing commercial disputes or balancing the books of loss-making firms when their energy could be better spent shaping policy and regulation. - Market distortion and crowding out
When government-backed firms compete with private companies, they often enjoy advantages such as soft budget constraints or easier access to credit. This can discourage private investment and stifle competition. By stepping back, the government signals to entrepreneurs and investors that they will compete on a level playing field. - Slow adaptation to change
Markets evolve rapidly, especially in sectors such as technology, energy and logistics. State-run enterprises can be slow to respond because every major change requires political approval or legal amendments. In fast-moving industries, that delay can be fatal to competitiveness.
The Sri Lankan Shift in Context
Handunneththi’s announcement reflects a broader recognition that the state’s role is not to crowd out private enterprise but to enable it. By liquidating non-functional SOEs, the government is seeking to reduce waste and sharpen its focus on policies and infrastructure that allow business to flourish. The move also helps to improve public finances at a time when every rupee counts.
Importantly, the minister emphasised that this is not a privatisation drive. Privatisation typically involves selling functioning assets to private investors. The current plan targets entities that have effectively ceased to operate or no longer serve a purpose. Liquidation in this context means winding down the legal entities, settling liabilities, and redeploying or releasing assets. Some may be merged with other public institutions if their remaining functions are still required.
Human and Social Dimensions
- Economic policy is never just about balance sheets. Real people work in these organisations. For employees, the announcement brings uncertainty. Those in the 33 affected entities may face redundancy or redeployment. The government will need to design fair transition arrangements, including severance packages, retraining opportunities, or absorption into other public sector roles where possible.
- For taxpayers, however, the long-term benefits are clear. Reducing the drain of idle SOEs means more efficient use of public funds and less pressure on borrowing or taxes. Citizens can expect those resources to be redirected towards services that matter: schools, hospitals, roads, and digital infrastructure.
- For the private sector, the shift creates breathing space. Entrepreneurs and investors gain confidence when the government makes clear that it will regulate and facilitate rather than compete. A predictable policy environment encourages domestic and foreign investment, which in turn generates jobs and growth.
Lessons for Other Governments
Sri Lanka’s approach illustrates a broader lesson relevant beyond its borders. Governments everywhere face the temptation to maintain control over businesses for reasons of national pride or political convenience. Yet unless an enterprise is clearly a natural monopoly or provides a critical public good, state ownership often delivers poor value. Periodic reviews of state portfolios, and the courage to wind up entities that no longer serve the public, are essential for fiscal health and economic dynamism.
Key steps other governments can take, drawn from this example:
- Audit and classify SOEs regularly to identify those that are dormant, unprofitable, or obsolete.
- Communicate policy clearly, distinguishing between liquidation of defunct entities and wholesale privatisation, to reduce public misunderstanding.
- Provide transition support for affected workers to minimise social disruption.
- Reinvest savings into public services and infrastructure to demonstrate the benefits of reform.
Outlook on Sri Lanka’s New Direction
Handunneththi’s statement signals a strategic pivot: the government will create the framework for growth but leave the actual running of businesses to those best equipped to compete. If implemented effectively, this shift could help stabilise public finances and unleash private-sector energy. It will not solve every economic challenge, and careful management is required to protect employees and ensure essential services continue. But the principle is clear: when government focuses on enabling rather than operating, the economy and its citizens stand to gain.
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