Experts’ say on privatization of SOEs

While the government mulls over, Business Bhutan takes a dip on the causes and concerns if SOEs in the country are privatized

Predominantly, State Owned Enterprises (SOEs) in the country were initially set up under the government’s arm without the private sector having any involvement in it.  However recent economic assessments and economic experts suggest that some SOEs would be better off if the ownership is transferred to the private sector. 

Everyone involved in this assessment, from policymakers to executives and governing bodies agree that the country’s SOEs are not in a good shape and that there are more challenges than opportunities. Except for a few, most of the SOEs are not doing well financially and are heavily dependent on government subsidy. In the wake of these events, the government is also mulling over the privatization of some of the SOEs, although the decision is yet to be ascertained.

“The government subsidy is declining every year and this raises questions of sustainability. On the other hand, SOEs also have social mandates to fulfill which limits their scope for growth and expansion. So the best way forward is to let the private sector take over those SOEs,” an economist with the Asian Development Bank (ADB) said.

He said that the pressure on SOEs has already mounted since Bhutan has graduated from the category of Least Developed Countries (LDCs). “Coupled with a heavy external debt, the SOEs must be able to generate as much domestic revenue possible, aligning with good corporate governance and contribute to the national exchequer.”

He added that the introduction of good corporate governance would also mean bringing policy changes, mandates and objectives from a wider perspective that encompasses the conscription of private sector in the fray. “This will immensely contribute to profitability and sustainability of the companies while letting the private sector grow in tandem.”

Chief Executive Officers (CEOs) of most of the SOEs pointed out that it is high time for something to be done in order to bring SOEs on track.

Some questioned the need of so many SOEs while others contemplated on divestments, closing down, merger or letting the private sector take over. “We have options and floating the shares in the stock market is one of them,” said one of the CEOs.

Most traders Business Bhutan talked to share the general concept that if the SOEs are privatized, there will be improved efficiency, developed capital markets and higher revenue generation.

“Our goals may, and will conflict, but the aim is to balance those very conflicting objectives. However, transference of ownership can lead directly to higher productivity of the SOE, and it will start right from the moment the ownership papers are signed,” a businessman from Thimphu said.

While there definitely will be the promotion of competition and efficiency, the private sector also feels that privatization of SOEs will bring about a reduction in government borrowing that will ultimately bring down the external debt figures which is currently one of the highest in the region.

It is also argued the private sector tends to run a business more efficiently because of the profit motive. However, critics argue private firms can exploit their monopoly power and ignore wider social costs.

The main argument for privatization is that private companies have a profit incentive to cut costs and be more efficient. If you work for a government-run industry managers do not usually share in any profits. However, a private firm is interested in making a profit, and so it is more likely to cut costs and be efficient.

It is argued governments make poor economic managers. They are motivated by political pressures rather than sound economic and business sense. For example, a state enterprise may employ surplus workers which are inefficient. The government may be reluctant to get rid of the workers because of the negative publicity involved in job losses. Therefore, SOEs often employ too many workers increasing inefficiency.

A government many think only in terms of the next election. Therefore, they may be unwilling to invest in infrastructure improvements that will benefit the firm in the long term because they are more concerned about projects that give a benefit before the election. It is easier to cut public sector investment than frontline services like healthcare.

It is argued that a private firm has pressure from shareholders to perform efficiently. If the firm is inefficient then the firm could be subject to a takeover. A state-owned firm doesn’t have this pressure and so it is easier for them to be inefficient.

Privatization of state-owned monopolies often occurs alongside deregulation (allowing more firms to enter the industry and increase the competitiveness of the market). It is this increase in competition that can be the greatest spur to improvements in efficiency. For example, there is now more competition in telecom and airline sectors.

Meanwhile, SOEs plays strategic roles in providing infrastructure and ensuring efficient public services and constitutes a major part of the economy. The SOEs in Bhutan are categorized into two groups¬- socially-oriented and commercially-oriented SOEs.

The government portfolio of SOEs consists of 38 companies, of which 19 directly under the Ministry of Finance and 19 through Druk Holding and Investments.

Besides SOEs’ contribution to the government coffer, SOEs also ensure the promotion of financial inclusion, priority lending to youth for education and skills development, universal postal services, rural electrification, clean and sustainable environment, among many others.

Tashi Namgyal from Thimphu