The Bhutanese Leading the way.
Normally, whenever there was a civil service pay hike in the past, it would be followed by the State Owned Enterprises (SOEs) under the Ministry of Finance (MoF) getting one a month or a few months later.
This time, the expectation is no different from the under 3,000 or so employees of the 13 SOEs which are Bhutan Broadcasting Service (BBS), Bhutan Development Bank Limited (BDBL), Bhutan Duty Free Limited (BDFL), Bhutan Livestock Development Corporation Limited (BLDCL), Bhutan Lottery (BL), Bhutan Post, Farm Machinery Corporation Limited (FMCL), Food Corporation of Bhutan (FCB), Green Bhutan, Kuensel, National Cottage and Small Industries Bank (CSI), National Housing Development Corporation Limited (NHDCL) and National Pension and Provident Fund (NPPF).
The Royal Bhutan Helicopter Service Limited (RBHSL) which was the 14th SOE is merged under Druk Air and is hence under DHI.
In the past, the hike would come with approval from their sole or largest shareholder MoF, either mainly through additional subsidies for the loss making companies or approving the hikes put forward by the profitable ones which would mean a decrease of dividends to the MoF.
No Budget and Parliamentary Criticism
However, this time around there is no special budget kept aside in the annual budget to allow for this.
The Acting Finance Secretary Leki Wangmo said, “Right now we don’t have the resources within the government’s finance to accommodate a 50 percent (pay hike) subsidy to any SOEs.”
The Acting Finance Secretary said that for the MoF SOEs they are running a very tight budget and there is also criticism of the MoF SOEs in the Parliament and there has always been an ongoing discussion about the inefficiencies of the SOEs.
The Economic and Finance Committee (EFC) of the National Assembly pointed out that as per the Budget report that out of the 13 SOEs 10 have incurred losses in 2022 despite the subsidy transfer of Nu 412.3 mn in 2022-23 budget. The tax and dividend contributions from the SOEs remained significantly low at Nu 245.5 mn.
The Committee urged the government to seriously review the non-performing SOEs considering the exorbitant financial deficits and come up with measures through the retrenchment of supplementary budget for SOEs by the government.
The EFC also recommended shutting down 4 SOEs.
Message to SOEs on efficiency and subsidies
The Acting Secretary said that under the MoF they have 13 SOEs and she has met a few of them with some questions on what is their salary increase and what they should expect.
“My communication with them has been quite clear which is that you have to show efficiency. You cannot expect to be bailed out by the state every time. I know you equally deserve the salary hike going by the justification that all of us are equally impacted by inflation, but then I said the state exchequer cannot also be taking the burden of all the inefficiencies. I said if you are willing to work hard and so long as you are able to show your profitability, I said your increase can be beyond 50 percent also. The main thing is that you have to drive efficiency and you have to show that you can afford it,” said the Acting Secretary.
She said she made it very clear to them to not expect anything from the Ministry of Finance and only when they show efficiency the MoF will be willing to plough back the efficiency to pay the SOE better.
In short the only SOEs who can give a pay hike are the ones making a profit and can afford it.
This means that out of the 13 SOEs the only ones who can afford a certain hike are NPPF, Bhutan Duty Free, Bhutan Lottery and the NHDCL (to a lesser extent).
Acting Secretary Leki said that apart from a very tight fiscal situation even the normal subsidies that they are giving are under a lot of pressure from Bhutan’s international developmental partners and so they have to rationalize on the subsidies.
The subsidies given to MoF SEOs in 2021-22 was Nu 700.82 mn, which dropped to Nu 412.35 mn in 2022-23 and will further drop to Nu 342.25 mn in the 2023-24 budget.
She said that at this point and time it is a bit tricky because none of the SOEs are doing well, but then again if the state keeps on bailing them out then where is the incentive for the SOEs to do better.
Secretary Leki said that for some of them whatever help is required is being given like helping them to see through their business process because the urgency is they can’t hold on to these SOEs for too long.
“They have carried on for too long and to some of the SOEs I am saying you all have products that are needed in the market, but you need to figure out the business model including FDI participation, IPOs, private sector partners etc. Just now some of them are in a really sorry state and we are trying to see how we can help them to correct their business models and then offload them,” she added.
She said if one looks at the budget the subsidy budgets are every tight and so there are subsidies only where it is required like for example subsidies for rural electrification, rural life insurance, house insurance etc.
Social mandate question
One argument of the SOEs has been on their social mandate which prevents them from being profitable.
Here, she said, “If you talk about the subsidies for whatever social mandate they might be running, for example for BBS we are subsidizing all their equipment through grants and loans, for Kuensel for their borrowings there is guarantees that are given that enables them to borrow at a cheaper rate. So wherever possible we are giving help to support these SOEs, but I don’t think we can keep bailing out operational inefficiencies forever also. At some point we must stop and if it really pinches them (SOEs in general) they should also think about turning around and working hard. Otherwise they will always piggy back on the state and I don’t think this supports anyone’s purpose in the long run.”
Talking more about the issue of social mandate she said that when the new FCB CEO was appointed her conversation with him was quite clear.
“I said don’t do business that erodes value from society. I said farmers produce and all but you should also be smart in how you play with the market. For example, the government is constructing a lot of cold storage facilities and handing it over to the FCB. It is not that they should buy from farmers and sell it at a bargain rate across the border.”
She said that all the cold storage facilities being built are subsidies to basically improve the agriculture market chain to use it efficiently and also run a viable business model.
Secretary Leki said that as long as they are established as a SOE and have gotten the name of a corporate organization their business model should be quite clear. She said some subsidies like buy back schemes had to be halted.
“So to the FCB senior management our message is quite clear which is they have to be efficient because they are a corporate organization. Financial Sustainability is the end goal and not to perpetually depend on government subsidies.”
The Acting Secretary said the principle remains the same that the state cannot go out and subsidize them and it becomes all the trickier in companies like Kuensel which are part owned by private shareholders and in a way the subsidization for Kuensel is that the government does all its printing and so in a way they do get a lot of the government’s businesses whether it is printing or anything. She said they might say that the printing budget has gone down over the years but they should also be able to reinvent their business to stay alive.
However, Kuensel has maintained in the past that the printing of text books which is the most lucrative printing job is essentially done outside Bhutan.
While companies like FCB, Kuensel and others mentioned by the Secretary do have some potential or capacity to earn there is also the matter of companies like BBS which are entirely dependent on the MoF for subsidies even for its pay and allowances.
Here the Secretary said, “BBS is a little tricky one but I also feel there is a lot of opportunities for BBS to reinvent themselves. We also need to be quite clear on whether BBS is going to be a public broadcaster or whether they are an SOE. BBS is heavily being subsidized by the state. Being in the media and all it is also a bit tricky, but we also need to figure out how to make BBS viable.”
She said she does not have any answers at the top of her head but the principle remains the same that if you subsidize one then the question obviously is why not others.
“So long as all of them are classified as 100 percent owned under the MoF you can’t pull one closer and give step motherly treatment to the other ones and so the principle would remain the same, she added.
A question to the Acting Secretary was on maybe if a few adjustments could later be made in the budget to pay the SOEs if they request the political government who then agrees.
Here, the Secretary said nothing can be adjusted from the budget as it is very tight, everything is earmarked and even some of the projects that the government wanted to do will only happen if there is financing, otherwise there is no fiscal space.
Give hike based on performance
The Acting Secretary said that SOEs need not give the same hike to all employees, but can give it based on performance.
She said that unlike the civil service where they had to give 50 percent lumpsum due to limitations, but because the Performance Management System in the SOEs are more robust they have more leeway and better framework of how they want to arrange employee compensation.
“You can keep a lower fixed hike and a high performance hike as a possibility. If you have 100 employees and 20 are star performers let them draw 100 percent allowance and you stagger it based on their performance and some of those who are low rated and not performing may not get, but their share will be taken by the star performers,” she said.
She said in a company they have a lot of ways for arranging things and trying to strive for efficiency and when you have efficiency even if you don’t get whatever rates you want at one go, you can stagger over a period of time.
The Acting Secretary indicated that even if the MoF SOEs are unable to give dividends to the MoF they will allow the hike from the profits as dividends from these companies have never had a major impact on state finances.
Attrition rate in SOEs and staying motivated
While the civil service has seen a high level of attrition that motivated the pay hike even the MoF SOEs have seen a high level of attrition with many people leaving.
The Secretary said while attrition was a major concern behind the hike for civil servants, but even with the 50 percent hike there is no guarantee that it can stop all this exodus as salaries are being compared to wages in Australia, Canada and developed countries.
She said the hike to civil servants was also because people are impacted by inflation and are going through difficult times and a lot of families are not able to meet ends meet.
“Maybe because of the fifty percent not being there for them, I do understand that maybe the SOEs people will start making all kinds of noises. My conversation with the few of SOEs that I have been talking to is that best person to help you is yourself and I said if you act demotivated then you are only catching yourself in a vicious cycle,” said the Secretary.
“I know it is a bit of a far fetched thing but only if you motivate yourselves to work hard and be committed to efficiency, you will be able to pay yourself better and if you show efficiency the MoF is not going to wipe off your profits as we are committed to ploughing it back, but the best person to help you is yourself,” she added.
She said for example if company A has certain money to pay a 10 percent hike and they pay their employees and next year if everyone is motivated and gives a better performance then next year they can give even more.
She said she definitely agrees there is a need to pay better but then it all has to depend on your affordability or your motivation on how you go in the longer term.
The Secretary also reminded how the current civil service hike is a unique one as most of the hike money is not coming from the government budget but from the special project of DHI like Bitcoins.
P II hope
One hope for SOEs is that if the hike cannot be given now then could it be given when P II comes on line by late 2024.
Here the Secretary Leki said she would not be comfortable with such a message as when Punatsangchu II comes on board they will also have a lot of things to do with the funds from P II by investing in the education system and they want to do a lot of different things.
“But if SOEs still turns out to be inefficient then we don’t want to pay out for inefficiencies. So we do not want them to be sitting there and saying okay we can afford to be inefficient as P II will come,” said the Secretary.
She said that though the MoF is really stretched in manpower but whatever manpower is available are being put in teams and are being sent to SOEs to see how they can help in reviving these companies.
The Bhutan SOE Annual Report 2021 under title of Reforms says MoF must revisit the Performance Management System (PMS) guideline to ensure that the performances of the SEs are monitored more frequently and initiate corrective measures for SOEs.
It also says MoF will further conduct a study to assess drivers of profitably of loss-making SOEs considering the poor performance and fiscal risks stemming from these SOEs.
It also says SOEs who are getting the subsidies and equity will be reviewed and no free money will be provided to SOEs.
It says there is a need to address the underlying causes for the leakages and improve performance of these SOEs, to effectively utilize the support given and avoid increasing the exposure moving forward.
