State-controlled firms’ entry into the stock markets has been touted as a measure to elevate transparency and improve corporate governance for quite some time. A number of such enterprises in Bangladesh, such as Power Grid Company, Titas Gas, Jamuna Oil, Padma Oil, and Meghna Petroleum, have been publicly listed. However, their current state tends to deter investors, making them virtually unattractive. Primarily, the proposition to list these state-owned enterprises (SOEs) was driven by the aspiration to instill better governance through market regulation.
Despite this, a comprehensive evaluation to ascertain if listed SOEs outshine their unlisted counterparts is noticeably absent. Of late, the argument leans towards expanding the array of commendable entities to amplify market depth. However, this reasoning collapses when the organizations enlisted offer disappointing returns and feeble governance. Consequently, discerning investors typically avoid these firms. To many, investing in these companies seems impracticable.
Three predominant reasons fuel this perception. Firstly, mismanagement of capital is a rampant issue. Rather than distributing sufficient dividends, listed SOEs have the tendency to accumulate reserves. Unfortunately, this saved capital finds its way into dubious financial institutions, likely guided by shady inside operations rather than fiduciary obligations.
Secondly, regulatory bodies like the Bangladesh Energy Regulatory Commission (BERC) form pricing and profit margin structures for these SOEs without regards to their listed status or minority shareholders’ rights. The sentiment that these companies should not be generating profits was openly expressed in public forums – a bizarre opinion for entities that have public investors.
Thirdly, incorrect methods of capital raising have been noted. The Bangladesh Submarine Cable Company serves as a pertinent example, having raised funds from the government without initially setting an equitable price. The price was subsequently adjusted at an exorbitant markdown to the market, outrightly flouting governance norms.
However, it is essential to note that these difficulties do not constitute a dead-end. Through political determination and an effective policy framework, reform can be brought about. Here are three potential measures that could aid in this venture. The first is the establishment of a clear dividend policy.
All listed SOEs should adopt and publicly disclose a concise dividend policy. This policy should detail the surplus cash (post the calculation for working capital and capex) and enforce its distribution. This arrangement would be beneficial for minority shareholders and the government, allowing the latter to include this revenue in its budgeting process.
The second measure is the creation of a unified treasury policy. Often, SOEs lack the requisite proficiency to competently govern large cash reserves. A uniform government treasury policy could guide the investment of surplus capital by SOEs, whether in approved banks, Treasury bills, or mutual funds, with open standards for the choice of fund manager.
The rigor of initial restriction in their investment options can be relaxed gradually. The third intervention should entail performance enhancement plans. All SOEs, irrespective of their listing status, should be subject to a sophisticated financial examination. This review must be supplemented with a comparison against international counterparts to set feasible, time-bound Key Performance Indicators (KPIs).
Resistance to reform, particularly from SOEs suffering losses, should lead authorities to serious deliberation regarding potential privatization or closure. As a way forward, the implementation of these corrective measures could start with a handful of selected SOEs.
Achieving success in the reform efforts with this initial batch would likely generate the necessary impulse to overhaul the entire sector. Without incorporating these steps, the mere listing of more SOEs could turn out to be not just pointless, but also detrimental to the nation’s capital markets.
It is critical to recognize that state-owned enterprises play a significant role in the overall economic growth of a country. Their transparency, governance structures, and financial performance are crucial factors that determine the confidence levels of both domestic and international investors.
However, as demonstrated by the Bangladesh experience, simply listing SOEs on the stock market does not automatically lead to improved performance or investor confidence. A comprehensive approach, incorporating stringent financial controls, clear dividend and treasury policies, and a commitment to investor rights, is required.
At a time when economies worldwide are grappling with uncertainties and fiscal pressures, the effective management of SOEs becomes even more crucial. In addition to ensuring SOEs’ profitable operation, redefining their role and optimizing their capital raising and allocation strategies can contribute significantly to national economic resilience.