Let SOEs reinvest in themselves

IT is a long-held belief that state-owned enterprises (SOEs) are convenient cash cows.
Annual dividends generated by these large, usually monopolistic businesses form part of the Government’s consolidated revenue or are in some instances tailored to specific programmes.
A few years ago, then Goroka MP Bire Kimisope argued in Parliament during debate on a supplementary budget that the Government was squeezing too much from the SOEs.
He said asking SOEs to contribute 70 per cent of their profits to the Government was a little too hard on them.
He suggested that instead of enforcing a 70 per return on dividends, the State should slash that by half and come down to at least 35 per cent so that there is enough leeway and space to our SOEs to be able to make the capital investments that they need to make.
The case of PNG Power is a sad case in point wherein the electricity supplier may not have been able to invest some of the profits it had made in its better days back into its infrastructure and systems.
The result of such neglect is a costly legacy that we all have to live with today.
The constant blackouts and badly rundown electricity generation and distribution systems are a testament to such neglect and stranglehold of the government on PNG Power in particular, and all SOEs generally.
Capital investment is required by the SOEs who can at times find themselves in a quandary; should they plough their profits back into their operations or pay the Government who spends that money on areas not even remotely connected to their line of businesses?
The performance of the SOEs has come under scrutiny for reasons including inefficiency, unreliability and high cost of goods and services.
It is therefore important that they be given some leeway to reinvest profits into their businesses in order to improve their performance for possible greater returns down the line.
That, for State-owned enterprises who have been around since pre-Independence, should be common business sense.
The decision of whether to reinvest profits or distribute them to the owners depends on a number of factors, however, there are several specific advantages to reinvesting profits.
When expanding a business, there are two primary sources of funds – debt and equity.
For SOEs here, it has been a history of keeping in operation using debt financing (including bank overdrafts) and some propping up from government.
A few have been able to post profits, much of which were paid as dividends.
Another advantage of using reinvested profits to fund business activities is that owner, in this case the state, can avoid diluting its ownership.
A legacy of a poor management and run-down infrastructure in one of the SOEs resulting in continual loss-making led to discussions of a possible partial takeover.
But that legacy had much to do with how the state had handled the companies over the years.
The nature of the business of most of these state enterprises is linked to the provision of the most essential of goods and services (air travel, seaport management, third party motor vehicle insurance, water, electricity, telecommunications, etc) places them in the public eye constantly.
In order for them to meet growing demand in both quality and reach of services, and to reap greater returns for future generations, SOEs need to reinvest some of their profits generated today.
SOEs are well-placed to provide a direct input to the pursuit of such aspirations if only the Government allows them to actively participate in the development agenda and not just milk dividends from them annually.