How do you deal with loss-making state-owned enterprises?

The Bangladesh government operates 49 organisations in the non-financial sectors: utilities, services, transport and communications, trade, agriculture and fisheries, manufacturing, construction and others. Among these, state-owned enterprises are profitable only in sectors where they are monopoly businesses, such as energy import and distribution, submarine cables and utilities.

The recent Bangladesh Economic Review 2022, which included the financial performance of public companies, however, again revealed a persisting trend of losses incurred by many state-owned organisations, including transport service providers like BRTC, Biman and Bangladesh Railway, and manufacturers like BTMC, BJMC and BSFIC.

Infographic: TBS

Different economists have different opinions on how to address this issue. However, broadly, the main debate is over whether state-owned entities should be privatised, should come under public-private partnership, or whether their efficiency can be improved through better management. The Business Standard reached out to three economists for their take on the subject. 

'Loss-making public enterprises should adopt alternative forms of industrialisation'  

Illustration: TBS

Dr Khondaker Golam Moazzem
Research Director, Centre for Policy Dialogue

The state-owned enterprises and corporations are of distinctive nature in terms of activities and services. Some are service related, some are utility providers, and some are monitoring and facilitative organisations. While some are manufacturers.

The four types of public entities have distinctive roles and they maintain relations with the private sector, or deal with demand and market structure in different ways.

They are also different in terms of economic viability. So, if any of the organisations, or even many of them, are in trouble or losing entities, a uniform solution will not be suitable equally for all. 

It is evident that service, as well as manufacturing-related state-owned organisations, are struggling to compete in the market where they share space with the private sector. The utility providers, meanwhile, are mostly monopolistic. 

Many state-owned organisations are incurring losses on a regular basis and have a lot of inefficiencies, as well as irregularities. Concerned sections are recommending different solutions to address the problems. I think evaluation of the organisations' performances should be done in a proper way. 

We do suggest that state-owned organisations losing competitiveness should adopt alternative forms of industrialisation. 

In the case of manufacturing sectors, including jute, sugar, paper, glass and ceramics, the government may lease out the properties to BSCIC, BEZA and BEPZA. These particular agencies have proved, in certain cases, congenial for successful industrialisation. Small and medium industries, as well as foreign investment or country-exclusive industrial zones, can be created there. There are many scopes, and we have seen some of these investments in recent times. 

Institutional inefficiency is a big concern for service-oriented state-owned organisations like BRTC. There are huge challenges from the private-run transport agencies and associations that are influential in the market. There are scopes to consider the ways to address these challenges. The services are availed mostly by low-income people. Suitable models can be adapted to make the sectors low-cost and at the same time profitable. 

Overall, the state-owned organisation should work in a competitive structure. They must be grown as profitable organisations. In such a case, public-private partnership may work. Such partnerships can be financial or technical. 

Globally, private sectors avoid bulk investment in the sectors which are monopolistic. These sectors are operated by state agencies. Utility services, including gas, power, water and sewerage, should be brought under competitive operation so that they cannot operate inefficiently or manipulate consumers' rights. They should not be allowed to shift the burdens of depreciation onto the consumers. 

That's why these sectors should ensure transparency while proper evaluation is crucial to address corruption and irregularities and to fix pricing policy so that consumers don't have to bear the 'unnecessary' burdens. 

Access to proper information from the state-owned organisation is challenging. We doubt the audit reports are done by globally recognised auditors. Recently, the Parliamentary Standing Committee on Public Undertakings became shocked to see the number of irregularities and objections to an audit on BPC.

Before any alternative investment or rejuvenation of the existing organisation, a thorough assessment of the financial state, assets and liability, reasons behind losses and recommended changes in the existing modality to attract long-term financing should be undertaken. 

To do this, four internationally recognised audit organisations, known as the Big Four, should be assigned for auditing. 

Khondaker Golam Moazzem spoke to The Business Standard's Sadiqur Rahman

'The government should not do too many things'

Illustration: TBS

Syed Akhtar Mahmood 
Economist 

The government has many responsibilities in the areas of public policy, regulations, social protection and provision of public goods. It does not have adequate capacity to carry out these responsibilities well, and this is reflected in poor design and implementation of public investment projects, gaps between policies on paper and their execution on the ground, inadequate enforcement of regulations, and gaps in social protection for the poor and the vulnerable. 

Given this, it is important that the government does not get involved in activities that the private sector is both willing and able to do. I do not understand, for example, why the government should be involved in the mobile phone business when there are so many good mobile phone companies in the private sector delivering adequate services. If there is any issue with the quality of their services, it should be dealt with by ensuring competition and, where competition is not enough, through regulations. There is little justification for the government to provide such services through Teletalk directly.  I can give many more examples like this from different sectors. 

By getting involved in such activities, the government is diverting scarce administrative resources and attention away from the activities that fall within its legitimate jurisdiction, such as the ones I mentioned at the outset. 

Government should move away from such activities by closing the enterprises or privatising them. Privatisation should involve a complete break. I am not a great fan of public-private ventures in the manufacturing sector. Half-way solutions are not good. Most such ventures end up with the worst of both worlds. Also, when SOEs are privatised, existing debts should be taken over by the government; the enterprises should start with a new slate. This should be reflected in the prices at which the enterprises are sold. 

There is often a reluctance to close factories. But an essential feature of a dynamic economy is the reallocation of resources. When an activity is no longer profitable, it is best to reallocate, as much as possible, the resources being used in that activity, such as land, labour and machines, to other activities where they can be more productive. All machines may not be reusable, but some may be. Workers who lose their jobs when a factory closes may find jobs elsewhere; the government may facilitate their job search or help them in acquiring new skills. Some may retire with the help of severance payments provided by the government.

A bold decision was taken exactly 20 years ago, i.e., the closure of the Adamjee Jute Mills. 26,000 workers lost their jobs, but the Adamjee EPZ set up in its place now employs more than 60,000 people. Quite a bit of the machinery used there was sold off to small jute mills that have sprung up in North Bengal. The government is saving crores of Taka that was previously used to cover the losses of the Adamjee Jute Mills. A dynamic economy needs such bold decisions.

Syed Akhtar Mahmood spoke to The Business Standard's Masum Billah

'Ownership is not the issue. Governance structure, regulatory oversight, prudential management matter'

Illustration: TBS

Dr Rashed Al Mahmud Titumir
Professor, Department of Development Studies, DU

There is neither a concrete nor a causal relationship between the level of service, efficiency of service, profitability of service vis-à-vis ownership of service in Bangladesh's public sector. 

Look at the case of the banking sector. The idea was that if there were more private entities, there would be competition and that would reduce the rate of interest. But what happened? We now have a higher interest rate because of the non-performing loans. So the cost of funds is high and there is an increased interest rate. 

So, it points to a kind of a governance structure that really perpetuates this - that the companies or the government are not held accountable to the shareholders or the citizens.

For example, in Geneva, state-owned public transport surely delivers you on-time service because the sector is accountable to the consumers. So, it is a matter of regulatory oversight and strict maintenance of the oversight. 

Lack of accountability is the major issue in Bangladesh. 

Let's take the case of Bangladesh Petroleum Corporation as an example. Its balance sheet has to be studied and if there is any mismatch, it has to be detected through the auditing process and due diligence. But nothing happens. There are dissimilarities and irregularities in terms of their investment pattern. If you are a bank, you are not sure whether investing in BPC is a prudent investment or not. 

In Bangladesh, the governance structure of state-owned organisations belongs to a rentier nature. There is no accountability and no prudential management. 

Many people would advocate for privatisation. But I would say that the inherent problems will exist , whether it is a public or private sector, where there is an oligopolistic tendency. 

For example, oligopoly prevails in the international gateway market where certain private organisations dominate. So it is an oligopolistic tendency in the absence of accountability to the shareholders, as well as to the citizens, that allows them to make a super-normal profit while the quality of service is deteriorating. Look at the telephone market. What is the rate of call dropping? Do we get any remedy? No. Because it is an oligopoly. 

Oligopolistic behaviour dictates price setting and that is happening here. In our case, there is no mechanism for accountability nor prudential oversight in public or private organisations. Hence, the oligopolistic market survives in a very raw form. 

You might have this in an advanced country but not in such a raw form. Someone might say: that the whole world's seed market is owned by some agro-businesses. Okay, but there is a competition commission, and there is an antitrust body that really maintains the regulatory oversight in the global market. That is why the Samsung CEO has to face jail time. But, in Bangladesh, there is no check and balance in place for the capitalists. 

Do you see the competition commission or the Directorate of National Consumers' Right Protection to really act in favour of citizens in Bangladesh? No. 

Rashed Al Mahmud Titumir spoke to The Business Standard's Sadiqur Rahman