Blogs

Reassessing State-Owned Enterprises in Bangladesh: Cash Management and Investment Practices

By Asif Khan, CFA

Chairman

EDGE AMC Limited

Posted on: 02 Sep, 2024

As a follow-up to this earlier post on government borrowing I now have some thoughts about State Owned Enterprises. State-owned enterprises can be largely classified into 3 types.

1. The healthy ones - These are profitable and largely self-sufficient. This category includes Padma Oil, Meghna Petroleum, Jamuna Oil, Titas Gas, etc. All of these have Net Cash (Cash minus debt) on the balance sheet and have been profitable.

2. Those that need some support - These need some support in the form of subsidies or occasional capital injection for large capex projects. One example could be Bangladesh Submarine Cable Company.

3. The white elephants - These are hugely unprofitable on their own and rely heavily on subsidies and other capital injections to stay afloat.

For now, I want to focus exclusively on Category 1. These category-one organizations have large surplus cash balances. As an example, Jamuna Oil has BDT59.6bn net cash as of June 2023. They invest this money in different securities and earn interest income. I have a few major issues with this practice.

1. Surplus cash should not be retained in these entities: Dividend policy best practices dictate companies should not hold surplus cash in their balance sheet. Other than some emergency amounts the rest should be paid in dividends to parent org. The parent can then pay the same amount in dividends to the government.

2. WPPF on surplus cash: Interest income makes up almost 90% of the profit before taxes and WPPF of Jamuna Oil. This is generated from the surplus cash which theoretically belongs to the shareholders. However, employees are enjoying 5% WPPF on this interest income. This is grossly unfair to both minority shareholders and the government.

3. Poor choice of investments: Jamuna Oil had BDT10bn of investments in GIB, Union Bank, and First Security Islami Bank. These are the worst banks in Bangladesh. It shows poor levels of integrity, poor knowledge of risk, and a lack of investment policy. As a state-owned entity, they could have simply invested in government treasury securities. My view is that all state-owned entities need to manage a centralized investment management strategy that outlines where they can and can't invest. There is a severe lack of knowledge on this not just in the public sector but also in the private sector and the only solution is making a broad Investment Policy Statement that outlines the acceptable instruments and counterparts.

p.s. Here Jamuna Oil is simply used for illustrative purposes. As someone pointed out Jamuna has large dues with BPC which should be cleared before shareholder dividends.