SOE or State Owned Enterprise is basically a state-owned commercial enterprise. These companies operate on the basis of separate legal identities, corporate structures and employees. These companies operate based on government finance on revenues generated from their own products or services. Since independence, the country’s private companies have faced a lot of competition due to the business scope of various state-owned enterprises, but now the scale of these state-owned enterprises has come down considerably. Now, the private sector is called the growth engine of the country’s economy.
On the other hand, these public enterprises have become white elephants for the country. As a result, these institutions are gradually being privatized or shut down. Whereas, at one time these organizations were the pioneers in creating a skilled workforce, contributing to the GDP, employment and revenue generation in the country
Although many government enterprises run commercial losses, they also indirectly contribute to the country’s economy and public welfare. Therefore, even after the loss. the government often continues to operate these organizations. Besides consistently occurring loss some state-owned enterprises (SOEs) are borrowing thousands of crores of takas in subsidies and nominal interest from the state to continue their operations. Until the fiscal year 2019- 2020, the total debt of 127 government agencies, which have expired and failed, is more than BDT Tk 250,000 crore.
Overview of State Owned Enterprises
In 1972, under the Nationalization Policy, the then government issued a Presidential Ordinance to nationalize the institutions left behind by Pakistani businessmen. Prior to independence, 34% of enterprises in various sectors were state-owned in 1979-1980, but the number of state-owned enterprises increased to 90% in 1982 as a result of the nationalization program. According to a 1994 World Bank survey (1994), at least 305 private enterprises, including industry, banking and financial institutes, were converted to public enterprise between 1974-1975.
A country that has just become independent has to face a lot of problems to run so many institutions without adequate preparation. As a result, after nationalization, these state-owned enterprises started facing loss. Meanwhile, privatization started in Bangladesh in 1972 through New Industrial Policy (NIP). Since then, the number of companies in this sector has been steadily declining as a result of privatization of public enterprises, establishment and acquisition of new companies and closing down of loss making companies.
According to Bangladesh Economic Review-2021 (Bangladesh Economic Survey 2021), 49 state-owned non-financial enterprises of the country have been classified into 7 main sectors. The companies operate under the sectors of industry, power-gas and water, transport and communication, trade, agriculture and fisheries, construction and services. Of these, 19 non-financial enterprises have the largest number of companies in the service sector, 7 in transport and communication, 7 in industry, power-gas and water, and 6 each in construction, 2 in agriculture and fisheries and 3 in trade. There are many more sub-sector companies and units in these enterprises.
According to the data of Bangladesh Economic Review 2021,from 2016 to 2020 the total operating revenue of the state-owned enterprises has increased at an average rate of 5.11 percent per annum. While in the fiscal year 2015-2016 this revenue was a little more than BDT 1 lakh 36 thousand crore (13602.69), in 2018-2019 it stood at around BDT 1 lakh 80 thousand crore (179630.54). Although it declined slightly in 2019-2020 (1822.20), the ongoing pandemic may be to blame.
But on the other hand, the total operating profit of these SOEs have been decreasing every year from 2016 to 2019. In the 2015-2016 financial year, where the operating surplus was more than BDT 11 thousand crore (11532.20), in the fiscal year 2018-19, it stood below BDT 3500 crore (3481.10). However, operating profit increased slightly in the fiscal year 2019-2020 (5686.57). However, the government made the last overall loss in these state-owned enterprises in the 2012-13 financial year, when the net loss was more than 2,500 crore BDT (2608.35). Since then till 2021, the government has been making net profit in the SOE sector for 8 consecutive years.
As of May 23, 2021, the government’s net profit from state-owned enterprises for the fiscal year 2020-2021 is about BDT 8,500 crore (8499.64). Of these, Bangladesh Petroleum Corporation or BPC made the highest profit, amounting to more than BDT 5,800 crore (5839.39), which was slightly higher than the previous year’s BDT 5,000 crore (508.54).BTRC (Bangladesh Telecommunication Regulatory Commission) was also in second place with a profit of over BDT 2200 crore (2232.29).
On the other hand, TCB or Trading Corporation of Bangladesh lost more than BDT 1000 crore (1036.28) in the Fiscal Year 2020-2021, which is the highest among state-owned enterprises. TCB’s previous year’s loss was about BDT186 crore (186.02).
Also, in the Fiscal Year 2019-2020 out of 49 SOEs, 38 made profit and 11 made loss. As of May 23, 2020-2021, 37 government enterprises are in profit, 11 are in loss and 1 is in neutral condition without any profit or loss.
Besides, according to the estimates of the Finance Division, till May 23, 2021, the total debt of the government enterprises of the country for DSL (Debt Service Liabilities DSL) amounted to about BDT1 Lakh 76 Thousand crore (1,75,567.23). Meanwhile, as of February 2021, the state-owned banks owed more than BDT 33,000 (33,451.28) crore to 30 government institutions in the country, out of which Outstanding loans of corporations alone amount to BDT 11,606.53 crore. However, the Bangladesh Sugar and Food Industries Corporation (BSFIC) alone owes about BDT 8,981.56 crore to the state-owned banks.
As per calculation it can be seen that, in the fiscal year 2019-20, 16 public entities had to pay around BDT 1 thousand 5 hundred in subsidies(1494.97). Among the subsidized companies, BIWTA, BADC and BSCIC-3 received more than BDT 1,167 (1,177.48) crore.
Contribution to the Nation
According to the Oxford Research Encyclopedia, state-owned enterprises are important contributors to the development and management of communities and economies of those countries. Also, SOE is an important element of a country’s government and governance. Although these are government-owned, they operate as a kind of hybrid entity operating under corporate rules, and provide a variety of services by operating in a space between the private and public sectors.
In some cases, these organizations act as semi-autonomous organizations, such as state para-government or quasi-government. In addition, according to the International Finance Corporation, their state-owned enterprises account for 20% of the world’s investment, 5% of their employment, and 40% of their domestic output.
Meanwhile, government enterprises contributed the most to the development of Bangladesh’s post-independence industry sector. In the country’s 50-year journey these government enterprises have laid the foundation for economy and skilled workforce development. Government enterprises also contribute a lot to the development of the country’s private sector. Initially, various training and workshops were provided to the workers in the public sector production activation of the country. And, later on, their skills have been used in private sector production.
This is how these public sector enterprises have a role to play in the development of the private sector of the country. Meanwhile, according to Consolidated Economic Analysis, in the 2018-19 fiscal year, more than 1,54,000 (1,54,865) people were employed in 49 organizations of the country, which increased to more than BDT 1 lakh 55 thousand (1,55,331) in the 2019-2020 revised budget. In other words, Besides creating the skilled labor force the government enterprises are playing a significant role in creating the country’s employment as well.
Why are the SOE’s Unable to Make Profit?
Some government enterprises are not able to generate profit despite getting almost all kinds of benefits including legal and land facilities, huge employment, budget and loan assistance. According to The Business Standard, “The loss of state-owned non-financial institutions is increasing as the value addition per worker continues to decline despite the huge cost behind manpower and purchase.” According to the Financial Express, the productivity of these organizations is lower than the wages of the workers.
In addition, one of the main reasons for the loss is mismanagement and corruption. However, according to a report in Dhaka Tribune, Limited Working Capital, Electricity Supply Problem, Outdated Factories and Balancing, Modernization, Rehabilitation, Expansion, Lack of capable senior management and high quality material are to be blamed according to prominent economic analyst Mamunur Rashid. Meanwhile, according to another report on the Desh Rupantor, bureaucratic complicity, corruption and lack of accountability are the main reasons for the loss, said the former lead economist of the World Bank’s Dhaka office Dr. Zahid Hossain.
The business scenario has become fast changing and competitive due to the growth of the private sector. Private companies are constantly adapting to new technologies and processes and competing globally. On the other hand, the adoption of new technology in government enterprises is very low. The process of adopting anything new to keep pace with the times is also very slow and time consuming. Again, the machines of most of the companies are getting old, so the output is much less, but the maintenance cost of these equipments is higher.
Besides, it goes without saying that the marketing and promotion of the products or services of these state-owned enterprises is not so much. As a result, in most cases the general public is unaware of these products or services, whereas private companies have huge investments in marketing. For these reasons, government enterprises cannot compete with the private sector and in many cases cannot make a profit.
But on the other hand, these companies can easily get huge investment from the government. If these investments are properly used, the government enterprises can provide better quality products or services at lower cost.
Previously being one of the main factors in development of the overall economy, these government enterprises have currently become a barrier towards the overall development of the country. According to Desh Rupantor, the industry sector is at the top of the list of companies in loss. Although the sector’s contribution to the country’s GDP is very low, the companies are consistently taking subsidies from the government.
However, according to the Dhaka Tribune, the cost can be reduced by closing non-competitive units to increase the efficiency of these organizations. In addition, to survive in a dynamic market, organizations need to be transparent and independent by changing their strategies and policies. Like developed countries, government institutions suffering from losses can be privatized or taken into the PPP model.