Over the next 3 years some state-owned enterprises (SOEs) will have to earn a higher return on capital, while other SOEs will have to carry out the state’s strategic objectives more responsible and to ensure the quality of public services. Governance Coordination Centre, an institution responsible for the implementation of good governance practices in the SOE sector together with the Ministry of the Economy and Innovation, submitted to the Government a resolution regarding SOEs’ profitability targets for the period of 2019-2021. Recalculated profitability targets will ensure that SOEs, while carrying out commercial activities, will seek to earn an adequate, risk-adjusted return and meet the expectations of the state.
Governance Coordination Centre calculations of the profitability targets for the period of 2019-2021are based on the updated methodology. “Until now targeted SOEs profitability ratios were determined by standard capital asset pricing model (CAPM), but for upcoming 3 years we resorted to using not only theoretical CAPM model, but also evaluated each SOE’s situation individually and assessed regulatory restrictions imposed on it.
The capital return requirements, that are imposed on private sector companies and SOEs are based on relative risk. Even in our daily practice, we know, that raising money for investment increases risk, but at the same time it increases the return on capital. A significant part of the SOEs operate in regulated sectors or manage large-scale infrastructure with less risk, so we require much lower return on capital from such SOEs.
Individual enterprise evaluation allows us to take into account the specifics of each SOE’s business and, by assessing the risk factors, to determine adequate rates of return“ – says Vidas Danielius, director of the Governance Coordination Centre.
Return on capital – only from commercial activities of the SOEs
Another methodological change implemented by the Governance Coordination Centre is the determination of targeted profitability ratios for significant commercial activities carried out by SOEs. “In order to clearly identify the special obligations imposed on state-owned enterprises or, in other words, commercially unviable and often even loss-making functions, and their impact on the results of commercial activities, their regulation has been modified at the end of 2018.
For those SOEs that do not carry out significant commercial activities, the target profitability ratios are not imposed. Those enterprises are not expected to bring financial returns, but more responsible implementation of social and strategic goals of the state, as well as quality public services are expected of them” noted V. Danielius, the director of Governance Coordination Centre.