The problem with State Owned Enterprises

The provision of public goods has been the main role of any government in all societies. Education, health, public transport, law enforcement, judicial services, public safety and other public infrastructure are some of the examples of public goods that are provided by the state for the people. In addition, some governments engage in economic activities when doing so provides a greater benefit for society, instead of relying only on the private sector. 

The Maldivian government has also invested in certain economic sectors, necessitated by such market failures. It has established various state-owned enterprises (SOEs), examples of which are the Bank of Maldives, Dhiraagu, MTCC, STO and STELCO. 

Over time, the government has also privatised part of such companies, and as a result, BML, Dhiraagu, MTCC, and STO are now public listed companies. As the private sector grows, and the economy develops the capacity to cater to market needs, governments are expected to reduce its economic activities, and further facilitate commerce by providing an enabling environment for businesses. It is never healthy for state owned enterprises to directly compete with private sector firms. 

At present there are 32 state owned enterprises in operation in the Maldives. At the end of 2020, these companies had a combined total assets value of MVR113 billion. During the same period, the combined total debt of all SOEs amounted to MVR27 billion — USD1.8 billion. 

Establishing a state owned business enterprise to fill the gap is justified when the private sector is unable to provide the required large capital investments, and when the private sector lacks the know-how to operate in the industry or sector. However, on careful observation of the list of state owned companies, it is clear that over the last 10 to 15 years, there have been many companies established by governments with no such clear justification. Many such companies have become a drain on the state budget, especially when board directors and management are remunerated from a budget provided by the state — most times at remunerations much higher than the “Civil Service” rate.

As per Ministry of Finance publications, 56 percent of state owned companies made a net loss by the end of the fourth quarter of 2020, and 43 percent of companies made a net loss over the same period in 2019. On annual terms, eight of the SOEs incurred a net loss in 2019, and the total combined losses of these companies amounted to MVR90 million. 

Of the companies that made a profit, less than 10 companies were able to generate enough to pay dividends to the government. One state owned company, while making essential contributions to food security and guaranteeing the availability of fuel, also engages in retail trade. 

Businesses in the private sector generally tend to be more efficient, mainly due to the profit motive, leading to cutting of costs in order to maximise it. On the other hand, managers and CEOs in state owned businesses do not operate with a view to profit or increasing value for shareholders. 

Most managers in state companies are motivated by political pressures rather than sound economic and business sense. In the Maldives, state owned companies have at times been used as extensions of government departments, to provide employment opportunities based on political affiliations. Sometimes governments are also reluctant to lay off workers, as it will be politically unpopular even though having too many employees makes the company inefficient. 

Another disadvantage of being a state owned company is the short-term goals of politicians. In the Maldives, every government lays down their visions, strategies, and projects for a five year term, and most actions are targeted towards winning in the next election. 

The debate in the Maldives is not whether to privatise or nationalise. But rather, whether we need some of the paper companies that have become a mainstay of recent governments.

The MMPRC scandal was a clear case study, and a significant warning, of how state owned enterprises were used as convenient vehicles for money laundering and embezzlement of state funds. Yet, there has not been much reform of SOEs since the Solih administration came to power. Companies like the Maldives Fund Management Corporation, Trade Net Maldives Corporation, Business Center Corporation and Regional Airports Corporation are some of the new editions to the list.

Each of these SOEs bring with them their Chief Executives and Managing Directors remunerated at “competitive” rates where there is essentially no competition. Each of these companies operate in a void where clear, specific, and measurable targets, and goals, are partially non-existent — with the intended purpose being generic “advancement,” “administration” or "regulation." As such, each of these companies introduce and widen the opportunity for misuse of state funds through their own unique logistical, and financial, requirements, while having little need to turn a profit — exacerbated by the fact that there is not even a minimum public commitment to a timeline in which these companies will start making a profit.

To be sure SOEs have their purpose; but eliminating any, where an existing or newer, government department can suffice will undoubtedly reduce the cost burden, increase transparency and ensure added accountability.