As part of the reform push for state-owned enterprises (SOEs), Chinese authorities are putting in place an appraisal mechanism for the sector to identify the underperforming or loss-making firms and take necessary follow-up action, which may include weeding out the very inefficient players.
Huang Shuhe, deputy head of the State-owned Assets Supervision and Administration Commission (SASAC), which oversees the nation’s government-owned enterprises and state investments, outlined the plans after a work conference on Sunday.
Performance evaluation will be a key step in mapping out the action plan on state firms, he said, noting that the overall objective of the government is to make the SOEs more competitive on the global stage, turn them more profit-driven and boost their contribution to the national economy.
The state assets regulator is determined to “severely deal with” companies that post persistent losses, Huang said, also warning that entities that fail to adhere to higher environmental and safety standards will face tough punishment.
To prevent loss-making state firms from becoming a bigger burden, the government will implement an appraisal mechanism which will include an assessment of top executives on their ability to ensure value-addition at the enterprises. The move is aimed at forcing them to respond swiftly to changes in the market environment and enhance the firms’ operating efficiency.
Key points in the assessment will be whether they have invested in a rational manner and improved the assets, Huang said, adding that financial discipline and capital efficiency will be crucial parameters.
Capital investment should be made in projects that are vital to national security or are the life blood of the economy. Investment in public services, forward-looking strategic industries and ecological conservation will be given high marks.
Meanwhile, SOEs that record lower than standard return on investment or are operating in fading industries will be made exit in an orderly manner. Firms that do not declare dividends to shareholders would be followed up on a case-by-case basis.
SOE officials’ remuneration packages would be linked to the annual appraisals. The government is also studying the possibility of implementing a long-term scheme to link the executives’ term in office to the performance. A medium to long-term incentive scheme will be launched at an appropriate time, with remunerations linked to operating results and value-addition achieved.
The initiatives are deemed vital as SOEs play an important role in China’s economy. More than 100 government enterprises, including entities such as oil refiner Sinopec and telecoms giant China Mobile, are expected contribute about 1.3 trillion yuan (US$214 billion) of net profit in 2013.
However, some firms — such as China COSCO Holdings and Aluminum Corp of China, which made losses of 9.5 billion yuan and 8.2 billion yuan respectively in 2012 — are expected to continue posting losses in 2013. The poor performance suggests that the firms’ management has failed to rise to the occasion and cope with the tough business environment amid a fast-changing market economy.
Observers say lack of the right mindset to operate in a transparent market environment has led to the poor performance of several SOEs. A tougher appraisal system based on company operations, as well as the introduction of private investors, is seen going some way in improving the situation.
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