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LESSONS:

Private Sector Development Program Loan

sector: Public Sector Management | country: Sri Lanka

Some measures, such as voluntary retirement schemes (VRS) for the involuntary termination of workers for state-owned enterprises (SOEs) that are to be divested, have significant budgetary implications. When including such measures in the policy matrix, it is important to ensure that the fiscal situation can support such measures and the necessary budget allocations are made.

In order to provide adequate flexibility, a program cluster should be designed as a set of single tranche subprograms, with each subprogram comprising clearly defined policy actions that are calibrated to be achievable within a relatively short time frame.

Proceeds received from the sale of state-owned enterprises (SOEs) are dependent on the economic environment and market conditions. A predetermined mandatory program for privatizations – with a quantified net asset value within a specified period to meet tranche release conditions – may not always optimize proceeds. Instead, it could result in underpricing of shares as demonstrated in the sale of Sri Lanka Telecom Ltd. and Sri Lanka Insurance Corporation Ltd., both of which were sold in order to meet tranche release conditions when the stock markets were plummeting worldwide and the Sri Lanka market was at a relatively low level. In addition, the regulatory authority must be operational to properly regulate the industry (i.e., Insurance Board of Sri Lanka) before a privatization takes place.

Under the program cluster approach, other multilateral institutions may finance programs originally proposed to be included in future subprograms of the cluster loan. The Private Sector Development Program’s (PSDP’s) subprogram 1 and proposed follow-on (subprogram 2) were put in place before the World Bank’s Poverty Reduction Strategy Credit was developed. The World Bank program overlaps some of the focus areas of PSDP’s subprogram 2. Organizational restructuring within ADB also shifted responsibility for many of the components that were originally envisioned to be included in subprogram 2 to other departments, which are implementing them. Although the PSDP was structured as a cluster, only 1 of the 15 areas considered in the preparatory work for subprogram 2 were actually included in subprogram 2.

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