The Problem with State-Owned Enterprises

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SOEs are an important part of the Trinidad and Tobago economy but, historically, the vast majority of companies in the SOE Sector have performed poorly in terms of financial profitability, and other non-financial social measures.

The State-Owned Enterprise (SOE) sector is comprised of fifty-nine (59) companies, of which forty-seven (47) are wholly-owned, seven (7) majority owned, and five (5) in which the Government has a minority shareholding. These enterprises are involved in the oil and gas industry, infrastructure development, banking and financial services, manufacturing, transport and communications, training, and the provision of social services.

SOEs contribute about twenty-five percent (25%) of Trinidad and Tobago’s Gross Domestic Product (GDP) and account for eight percent (8%) of total employment.  Government began to invest heavily in commercial activity between 1973-1983, after it was determined that the private sector did not have the capacity to drive the country’s commercial and economic development.

In the financial year 2013, Government’s equity holding in these enterprises totaled TT$8,499.1 million and a net profit of TT$7,586.1 million was realised, 90% of which came from 2-3 organisations. The capital expenditure in support of State Enterprises for the period October 2012 to September 2013 totaled TT$3,856.4 million.

Historically, the vast majority of companies in the SOE Sector in Trinidad and Tobago have performed poorly in terms of financial profitability, and other non-financial social measures.  Efforts throughout the years, including rationalisation, divestment, and governance guidelines, have had little impact on the overall performance of SOEs.

Without a clear charter to guide the growth and development of the SOE sector, distinguished economist Frank Rampersad, in an address to the Economics Association of Trinidad and Tobago in 1991, offered the following five (5) criteria:

  1. to facilitate greater national control over decision making in important areas of the  i.e. the so called ‘commanding heights’ of the economy;
  2. to secure greater national ownership in areas of the economy which the Government  considered to be sensitive or important;
  3. to promote economic transformation, or alternatively, to accelerate the pace of  economic transformation in which the local or foreign Private Sector was reluctant to enter;
  4. to avoid the monopolization of an important sector by a foreign owned enterprise;
  5. to circumvent the inherent delays involved in the bureaucracy in the delivery of  services or a good considered necessary for the public welfare.

Based on the five (5) criteria advanced for the State’s involvement in the commercial sector, one can conclude that only one (1) objective has been achieved, i.e. to accelerate the pace of economic transformation.

The so-called ‘commanding heights’ doctrine has been defeated, since seventy-five percent (75%) of the country’s hydrocarbon production is controlled by multinational oil and gas companies.  The five (5) multinationals account for ninety-nine percent (99%) of Trinidad’s natural gas production, with BPTT alone accounting for fifty-five percent (55%).  In this context, two other criteria namely, sector monopolisation by foreign-owned enterprises, and local ownership of sensitive industries also fall by the wayside.

The argument that ‘Special Purpose’ SOEs would circumvent the inherent delays involved in the bureaucracy has given rise to a series of unintended consequences, not the least being perceived graft and corruption, regarding the tendering process particularly, significant cost overruns and delays on projects, and the emasculation of the Public Service.

In the Trinidad and Tobago political system, the administration in power behaves as if they are the owners of SOEs.  Then when the electorate votes in one political party in favour of another – Boards, General Managers and Top Executives of SOEs are replaced wholesale.

Literally, in all cases, SOE Boards are comprised of political appointees, many of whom have little business or industry competence. Most SOE Boards see their principal role as that of Agent of the Government, and by extension to the party in power. Little or no effort is made to insulate the General Manager against undue Government intervention, and complaints are made against Boards that have become micromanagers. Indeed, in many instances, the Chairperson has taken over most of the CEO’s tasks. Boards and Ministers use SOEs for employment purposes, they also negotiate to nominate their candidates for Executive and Managerial positions, and sometimes to influence employment at the most junior levels.

Because of the career risks involved, most CEOs and Managers of SOEs are not recruited from the best possible talent pool. In other SOEs, Managers strive to keep the Government happy with the company’s political performance.  They are unable to hire or fire, reward employees, and to make pricing or market decisions.  They are heavily bureaucratised organisations in which employees are motivated either by the job security attached to governmental employment, or in some instances such as the heavily unionised utilities, by excessive wages permitted by organisations that are not held accountable by market criteria.

Ostensibly, an SOE’s strategic plan is supposed to be in alignment with the Line Ministry’s strategic plan, but no evidence of this linkage could be ascertained. A major problem lies in the process of Strategic Planning itself, since plans and strategies are likely to change during the tenure of one Government in power, or with a change in Government, during the strategic planning period. SOEs are being asked to be profitable, or to cover operating costs but in many cases, this is not possible since companies cannot increase prices, reduce staff, or acquire funding, without Government approval. Successive Governments have decided, for example, that the subsidies on petroleum, electricity, flour and rice are not to be removed. Many SOEs, which operate in a competitive market, are burdened by demands for achieving non-economic goals, thus reducing the ability of these companies to compete.
A major obstacle to change in Trinidad and Tobago organisations lies in the inherent characteristics of the country’s national culture. Lee Kuan Yew himself dismissed Trinidad and Tobago as having a ‘Carnival Mentality’ with reference to the country’s lackadaisical culture.  The high collectivist element in Trinidad’s national culture pervades Public Sector organisations, and employees believe that the Government is the provider of jobs, and this is reinforced by politicians who, fearful of losing power and influence, have leveraged national cultural weaknesses to disregard and sometimes sabotage reforms. Change therefore becomes extremely difficult, when national culture impediments are institutionalised in the SOE Sector.

Politics, culture, incompetent Boards, frustrated Executives and Managers with little incentive to be motivated beyond the basic roles, non-competitive pay and reward packages at the senior levels, and employees who view their jobs as entitlements, all converge to frustrate attempts at performance and transformation in SOEs.

For the most part, SOEs in Trinidad and Tobago are generally inefficient and many of them have become a burden on the Government purse. The citizens of Trinidad and Tobago bear the brunt of this economic burden. Therefore, ways to increase efficiency, management effectiveness, and transformation of SOEs are of paramount national importance. Specific recommendations include the undertaking of a strategic review of the SOE portfolio to determine which SOEs are to be retained in the national interest, which should be divested, privatised, or reorganised as public-private enterprises.

To the credit of the Government, some steps toward divestment have begun with the offering of twenty percent (20%) of the issued shares of the First Citizens Bank via an IPO, and the identification of an additional five (5) companies for partial divestment.  The government also launched the Public Private Partnership (PPP) Unit to implement PPP projects.  However, these early attempts at both divestment and PPP have been mired in scandal and allegations of questionable procurement practices and cronyism.

Government should appoint competent members to the Board of Directors. This could be accomplished by the formation of a Board Selection Committee to include Government, the Opposition, the Private Sector, the Independent Senate, the Trade Union Movement, and NGOs.  The Government should not accord SOEs subsidies and special privileges. The performance of SOEs should be benchmarked against industry peers.

For SOEs deemed to be national champions, the board should attract the best professional talent to manage these SOEs. This would require the review of recruitment, and reward protocols, and non-interference with the operations by politicians.

Finally, the government should not corporatise Special Purpose companies, which are not meant to be commercially-oriented. As much as possible, the functions of these Companies should be put back into the Ministry, which is supposed to deliver the particular good or service.  An antecedent to this would require a comprehensive review and reform of the Public Service which has been espoused for many decades by various administrations and have received at best, lip service.

In conclusion, the fundamental problems relating to SOEs are tied to issues of politics, goal displacement, culture and leadership. The transactional solutions are relatively simple.  The transformational barriers demand a radical shift in the national culture and psyche!  Moreover, it requires a renaissance in the conduct of politics in Trinidad and Tobago.