World Bank suggests SOEs to pay dividends
(Xinhua)
Updated: 2006-02-12 09:41

The World Bank said in its just-published report that China's large state-owned enterprises (SOEs), which made billions of U.S. dollars a year, should pay dividends to the Ministry of Finance.

The bank said in a report released on its website that no government entity, neither the Ministry of Finance (MOF) nor the central government's State-Owned Assets Supervision and Administration Commission (SASAC) receives any dividends from large centrally-administered SOEs for historical reasons associated with the country's 1994 tax reform.

This pattern mostly applies as well to local governments and locally-administered SOEs.  This is in contrast with other countries, where the state, as key shareholder, normally receives dividends from SOEs, just like any other shareholder, the bank said.

The large SOEs overseen by SASAC made net profits of 299 billion yuan (37.3 billion U.S. dollars) during the first half of 2005 and 400 billion yuan in 2004, according to the report.

The bank said a sound dividend policy for China's SOEs could enhance the efficiency of re-investments by SOEs and improve the overall allocation of public financial resources, and corporate sector saving including those by SOEs is a key contributor to China's high rates of saving and investment.

Excessive use of retained earnings to facilitate industrial expansion poses disadvantages, however, for China's developing economy, it warned.

Within-firm allocation of capital may not receive the same scrutiny as channeling via the financial sector, which may hurt efficiency, the bank said.

Lack of scrutiny may lead to pro-cyclical investment, making the economy more prone to boom and bust cycles.  These issues are of particular concern where corporate governance is weak, it argued.

Notably, the state has borne most of the restructuring costs for China's SOEs, taking over social obligations such as schools and hospitals as well as unemployment benefits and worker pensions. Indeed, the shedding of these obligations has played a big part in the rise in SOE profits  all the more reason for the State to recover some of its costs, according to the report.

In principle, SOE profits and privatization proceeds are public financial revenues, whose disposition should be subject to the budget process and National People's Congress (NPC) approvals, the bank said.

Better prioritization of public spending across sectors requires an integrated budgeting process in which all available public financial resources are allocated according to one set of criteria to meet public needs, it said.

The current non-payment of dividends implicitly assumes that there is no better use of SOE profits other than re-investment back into SOEs, it added.

"Clearly, however, China faces urgent challenges in re-focusing its public spending to improve key services.  For example, if 50 percent of SOE profits, estimated at 6.5 percent of GDP in 2004, were distributed to the budget, this would support an 85 percent increase in government spending on education and health."

Among developed countries, the norm is for SOE profits to go to the finance ministry for general public uses, whichever agency acts as state shareholder, according to the report.

"Thus, while SASAC acts as the state shareholder, both theory and international best practices suggest that SOE dividends and any privatization proceeds should go to the MOF."