Assessing Privatization in Sri Lanka: Distribution and Gov

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Assessing Privatization in Sri Lanka:

Distribution and Governance




In Sri Lanka, privatization is ideologically allied to the liberalization process

that jumpstarted the economy in 1977. It was only a decade later, however,

that privatization became a state policy, and after 1989 that the sale of public

enterprises began to gather momentum. This slow start to privatization

is largely attributed to the continued use of state-owned enterprises (SOEs)

as vehicles of employment and political patronage (Knight-John 1995).

The 1977–89 period, characterized by macroeconomic instability and political

violence, was not conducive to rigorous reform efforts. During the first

wave of privatization (1989–94), the government divested 43 commercial

enterprises (typified as relatively less complex), raising about rupees (Rs.)

11.6 billion.1 The second wave of privatization (1995–present), which has witnessed

the divestiture and restructuring of several public utilities and major

ventures in the services sector, amounts to Rs.46.2 billion.

More recently, the need for structural reforms, including privatization, has

been accentuated by the country’s dismal economic performance, stemming

from a series of adverse external shocks, domestic political uncertainties,

and entrenched structural rigidities. In 2001, the economy recorded a negative

real growth rate of 1.5 percent—the first economic contraction since


Malathy Knight-John is a research fellow at the Institute of Policy Studies in Colombo, Sri Lanka. P.P.A.

Wasantha Athukorala is a lecturer in the department of economics at the University of Peradeniya, Sri

Lanka. The authors gratefully acknowledge Saman Kelegama and other colleagues at the Institute of

Policy Studies for their valuable comments on earlier drafts of this chapter.

1. In this chapter, the term divestiture refers to both a partial and total sale of state assets to

private parties...