MoF’s letter to SOEs to submit pay hike proposals comes with conditions

Recently, the Department of Macro-Fiscal and Development Finance under the Ministry of Finance (MoF) sent out an email to the various State Owned Enterprises (SOEs) under the MoF to find out what are the expectations and plans of the SOEs over the pay hike and whether SOEs can adjust the salary hike from their own resources or not with three options being given.

The email gives five pages or forms to be filled to the SOEs. The first page is on the existing headcount of the staff and salary cost. The second page is the three options of giving pay hikes while the third page is to give the impact on salary and headcount due to the hike.

The fourth page is on how the SOE plans to fund the hike through incremental re-engineering savings like productivity savings through organizational changes, reduction in overtime and productivity saving through process re-engineering and the final page is on the revised 2023 Financial Year profit and loss.

A SOE CEO said, “They wanted to hear from us about the plan. They are planning to compile the expectations for those who can give and those who do not have the resources. There is no concrete decision.”

The Finance Minister Lyonpo Namgay Tshering said, “I think from the government side there is nothing different to what Lyonchhen has already announced (that there will be a hike for SOEs). But from the finance side I have instructed my finance team and the acting Finance Secretary to inform all the SOEs not only on affordability, but if they are to increase the salary to what extent they will be increasing and obviously it cannot be going beyond what is given for the Civil Servants percentage wise.”

“For that matter we have asked all the SOEs to work on their salary increase and to submit the proposal immediately to the MoF and from there we will review and submit to the cabinet. So we want to see what will the raise be like and what will be the financial implications and what are the potential sources of generating revenue to offset the implications from the pay raise. So this is a positive instruction being given to the SOEs,” Lyonpo added.

He said the salary raise will be there but to what extent he cannot say, but SOEs need to improve operational efficiency.

He said as per the corporate governance guidelines a certain degree of decision making authority has to be given to the board and management.

He said while not all SOEs are financially comfortable but SOEs who are not financially comfortable do have a social mandate.

He said the govt has to rationally look into all these aspects as if SOEs choose to venture into full commercial mandate leaving aside the social mandate then what would be the implications in terms of public service delivery.

“So directly or indirectly there are cost implications when they carry a social mandate. It doesn’t mean they cannot make a profit as they can make it if they do not have any social mandate,” said Lyonpo.

Lyonpo said they will not only look at the quantitative aspect in terms of getting a pay raise or not, if you have an income or not but they have to look into the quality aspect as well meaning like how can they improve the operational efficiency of any particular SOE. 

Lyonpo gave the example of the Bhutan Livestock Development Corporation (BLDC) saying that a year ago all the sausages were imported either from India or Thailand and now the BLDC is  supplying it. He said this is purely commercial in nature and there are also some miscalculations happening as in the investment going into the wrong direction (competing with farmers).

“If we can withdraw our arms from there and improve the operation and efficiency, I can see there are a lot of opportunities for other SOEs as well to do that,” said Lyonpo.

He said at this point it is not about not having money as every SOE are the same.

“If we say there is no money for the hike and ask to close down the SOE then it only signals that the SOE is not important or critical.  If we feel the SOE can facilitate the the government with some social mandate, then the SOE is needed and critical and so I think at this point in time we have to at any cost give a pay raise. But with the condition that as early as possible or within the shortest time we have to bring in operational efficiency,” said Lyonpo.

Lyonpo said there are unnecessary costs being made like Farm shops under FCBL which was been done away with.

He said no additional SOEs were created in this tenure and most SOEs were created during the tenure of the second government, but they respect that the SOEs were created with a certain mandate. He said they were also created to provide employment when there was pressure due to youth unemployment.

Lyonpo said if they close down the SOEs, there will be the contingent liability on the government as there is fixed asset capital formation like offices, branches and infrastructure. 

“The best thing for us is to capitalize and when it is capitalized business as usual will not work,” said Lyonpo.

What SOEs will get

The minister said that while SOEs like Bhutan Duty Free, Bhutan Lottery, BDBL and NPPF should not have problem in giving hikes due to profits the challenge is more for the others, but he said they also fall in different categories.

Lyonpo said for Bhutan Broadcasting Service (BBS) there is no looking back as it has to be supported by the government.

Lyonpo said if they ask BBS to go commercial given the small market BBS may easily fall prey to being a political tool like in the Indian state of Tamil Nadu where two political parties have their own TV channels.

He said the other thing that can happen is that as the only broadcast channel they will hike up the advertisement costs and since 90 percent of the notifications come from the government, then the government could cough up more than what they will be giving to BBS as operational subsidy to increase the salary.

In the case of Farm Machinery Corporation Limited (FMCL) he said while a lot of reform initiatives have happened but they carry a social mandate. He said this is very tricky situation as the government has told FMCL that when they give farm machinery on hire to rural people they cannot increase the price of the hiring cost as and when they like.

They have a social mandate serving the underprivileged ones who cannot afford to buy a power tiller or other farm machinery.

“Tomorrow if we ask FMCL to go fully commercial people will come knocking at the door asking why the hiring cost of power tiller has gone up by 100 percent overnight. We need to prepare people to graduate. It is not the sustainability of FMCL but the acceptability and affordability of our people,” said Lyonpo.

On the National Housing Development Corporation Limited (NHDCL) Lyonpo said it is profitable but a major chunk of the money goes for repairs and maintenance which is very high in real estate. He said the government would pump in money but they need to look into improving the operational efficiency. Likewise, he said there is no need to give an immediate hike unlike critical SOEs where there is no way out.

Lyonpo said that in the case of Kuensel Corporation the hike will depend on the willingness and consensus from every shareholder.

“If the shareholders say they cannot afford then the government has to follow as we have a very marginal majority shareholding (51%),” Lyonpo added.

 He said while there is no trend to give an operational subsidy to Kuensel, as an SOE it might qualify to get a guarantee from the government to venture into borrowing, but that too will be pro rated to suit the portion of the government share.

The minister said there are a lot of commercial avenues that Green Bhutan Corporation Limited (GBCL) can take up. He said they are waiting for a green signal from the government to come up with a mega water park in the south for leisure and it is a win win as people travel all the way to Bangkok with additional cost to take children to Dream World.

Lyonpo said the original mandate of GBCL was landscaping and afforestation which was already being done by the Forest Department and so GBCL is surviving on the money sanctioned by the Forest Department who hire GBCL to do the job. He said GCBL needs to diversify its mandate as they don’t carry any social mandate and so GBCL is taking it seriously as Bhutan needs more amusement and recreational parks and so they have a lot of scope.

Lyonpo said here that even if they cannot afford to give a hike, for SOEs who have a better opportunity to generate richer revenue they can resort to borrowing and the government will give the guarantee.

He said that SOEs will also get additional capital.

In terms of where the money will come from the minister said the money will not go from the government coffer.

“The SOEs will have other financing mechanisms as the SOEs are independent legal business entities and the government will work with them as to how to bring the money in, and not as a direct operational subsidy being met by the government like in the case of BBS,” said Lyonpo.

Lyonpo said it is not only borrowing but there are other mechanisms too.

“I am pretty sure that operational efficiency will bring in a lot of savings. Another option we are looking is to divest or float the shares after brining in operational efficiency. If we don’t bring in operational efficiency with the case in point of BLDC, then no private individual will be willing to subscribe to a share. The moment we bring operational efficiency and there is better revenue generation then the private individuals will be willing to partake in subscribing the shares and this will bring additional capital. We will be breaking the conventional norms that SOE has to be 100 percent owned by the government,” said Lyonpo.

When asked of the government will float T Bills to pay for the hike he said it is only for the government for short term cash management.

On when the hike for MoF SOEs will be effective he said it will not be fair to give a hike by missing a substantial amount of time and so like the past norm the hike will apply retrospectively. 

Lyonpo said that the pay structure in the SOEs should be pegged with the equivalent position in the civil service so that any pay hike will not be complicated.

From the above it is clear that the government has very limited resources and, as far as possible, it wants SOEs to finance their own hike or share the burden and the hike will not come for free but major improvements to efficiency are being asked for.

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