The government will redefine and streamline the role of state enterprises in about three months time which could lead to privatisation of some state owned companies.

A task force has begun the review process already.

Is there a genuine need for the government to own the particular SOE? Why should the government do business if private sector can do? Should the government divest shares to the public, or implement a public private partnership (PPP) model? These are few questions the government is trying to answer through the review.

This move, according to Lyonchhen Dr Lotay Tshering, is to promote private sector growth that is suppressed by big state enterprises.

He said that some SOEs, however, were indispensable for the government because of the social mandates they shouldered. “This is why we need to redefine the roles of the SOEs.”

For instance, Bhutan Post, Food Corporation of Bhutan and a few other SOEs had to diversify their business because their primary mandate became obsolete with emergence of technology and increasing income of the people.

Finance Minister Namgay Tshering said that to promote private sector growth, the government should not venture in businesses where the private sector had the capacity.

Based on the recommendations of the task force, the government will decide whether there is genuine need for the government to own SOEs.

This move is also in tune with the World Bank’s findings that the state’s dominance of the economy has constrained private sector development, leading to market distortion and lack of competition.

A working paper of the World Bank, ‘Bhutan Development Report-A Path to Inclusive and Sustainable Development’, states that due to Bhutan’s small domestic market, sparse population, and high transportation costs, the risks associated with private investment are comparatively higher.

The state enterprises, according to the World Bank, operate in commercial sectors such as manufacturing, energy, natural resources, finance, communication, aviation, trading, and real estate sectors.

“The strong linkages that exist between policy makers and managers of SOEs inhibit a level playing field and may discourage private investment,” the report states.

New CG guideline

There are about 16 state enterprises under the finance ministry, some as young as three years old. According to the budget reports, performances of some of the SOEs were unsatisfactory, often necessitating government subsidies. This ensued the government to forego revenue from tax and dividend.

The performance of SOEs becomes critical for the government coffer as the country prepares to graduate from LDC category. Because of this, promoting good corporate governance has become key to enhance operational performance of the state enterprises and while increasing shareholder value.

Till date, the guidelines for boards of government corporations and some clauses of the public finance Act and companies Act were used to the monitor the SOEs.

Finance ministry has now come up with a corporate governance (CG) guideline for state enterprises to strengthen and promote good corporate governance and to ensure uniform application of standards across all state enterprises.

Finance minister said that there were no strong rules of procedure for the board and management of the SOEs. “Before we actually step deep and work on streamlining their (SOEs) functions, we want to have a clear rules of procedure,” he said. This new CG manual, he said, would facilitate state enterprises to maximise their economic value.

The guideline that came into force effective from January this year spells out clearly ownership structures, oversight functions of the government, roles and responsibilities of the Board and management.

“Stakeholders including employees, shall be able to freely communicate their concerns about unethical practices to the Board or to the competent public authorities,” states a clause.

There is also a provision restricting stakeholders from using SOEs as vehicles for financing political activities. The guideline also places more accountability and more responsibilities on board and management.

Even the composition of  Board should be balance of diverse skills, core competencies and capabilities, knowledge and experience. 

Board members are also required to undergo an induction programme with the SOE on their appointment.

It clearly mentions that finance minister would be prohibited from being involved in the governance or day-to-day management decisions of the state enterprises.

According to the guideline, the government will endorse the nomination and appointment of chairperson, board directors and chief executive officer and remuneration. CEO’s reappointment will also be based on performance and will require the consent of 75 percent of board.

“In the event of exceptional circumstances such as when there is unexpected vacuum in the CEO’s position, the Board shall reserve the authority to temporarily manage day-to-day affairs of the Company till such time the new CEO is appointed.”

“Board Directors shall not be entitled to gifts and concessions on the services or products of the Companies,” states the guideline. 

The government also reserves the right to approve borrowing, investment and divestment of shares/privatisation of companies based on the recommendations of the Ministry of Finance. 

State enterprises, as per the guideline, are required to submit annual performance report, report on material loss, unauthorised and irregular expenditure.

The Board and the management of the Company are also required to undertake an Annual Performance Compact (APC), agreeing on financial and non-financial annual targets. The Ministry of Finance will review the Annual Performance Compact between the Board and management and set any additional targets if required.

Divestment of shares

While the government is contemplating to privatise some SOEs, financial analysts are of the view that divestment of shares to the public would help the capital market.

In the last four years, the supply of shares in the stock market stopped with no new listing. However, the demand kept growing and, consequently, the market price of share in the secondary market skyrocketed. Over the last two years, market price of share of some companies increased to the tune of 200 percent.

In three years, between 2015 and 2018, the total market capitalisation, which is the market value of total available shares, increased by Nu 11B. The market value of shares of 21 listed companies increased from Nu 24B in 2015 to Nu 35B in 2018. As of yesterday, market capitalisation was recorded Nu 44B. This is considering the fact that no new companies were listed since 2015, meaning that market price of shares increased dramatically while number of shares in the market did not. 

According to the Royal Securities Exchange, this trend was leading to over-valuation of companies as the increase in share prices are loftier compared with the growth in net worth of the companies.

“Divesting the shares of SOEs could stabilise the stock prices,” said a financial analyst.

However, he said that big private companies should also be encouraged to list on the stock exchange. Listing would mean complying with standard auditing and accounting norms, leading to transparency.

From the revenue perspective, of the total tax revenue for FY 2017-18 amounting to Nu 27B, corporate income tax contributed more than Nu 9B and business income tax contributed Nu 1.49B.

While the primary contributor to the CIT were the DHI companies, in 2017 alone, 19 listed companies paid a CIT of Nu 1.26B, almost equal to tax paid by 31,551 BIT payers.

There is also an opportunity to curb revenue leakage by encouraging more businesses to list.

Tshering Dorji