no. 2011-06- financial evaluation of govt corp

NO. 2011-6 JULY 2011

CPBRD POLICY BRIEF CONGRESSIONAL POLICY AND BUDGET RESEARCH DEPARTMENT

FINANCIAL EVALUATION

OF GOVERNMENT CORPORATIONS*

Stocktaking of financial performance by the public sector has become more relevant in the light of recent controversies involving Government-Owned and Controlled Corporations (GOCCs). Reports of unconscionable expenses, extravagant compensation package for executives/staff, and large subsidies to losing corporations have drawn much flak especially at a time when the national government is back on the deficit track.1 Under the new administration where prudence and operational efficiency are critical in achieving optimal spending2, GOCCs are very much challenged to prove their worth and existence. The recently approved GOCC Governance Act (RA 10149) seeks to strengthen the role of the State in promoting financial viability and fiscal discipline among GOCCs and in making them more responsive to the needs of the people. Under the law, the newly-created Governance Commission for GOCCs or GCG, among other things, is tasked to conduct periodic study, evaluation and assessment of the performance of GOCCs and require reports on their operations and management including, but not limited to asset and finance management – functions which aim to determine their relevance. Further, GOCC officers are required to “apply sound business principles to ensure the financial soundness of the corporation”. Performance assessment among GOCCs is a daunting task as it requires not only substantial time/ resources but also a certain level of expertise to generate a comprehensive and objective report on their accomplishments (or non-accomplishments). The size of the sector is another factor that renders the performance evaluation of all existing GOCCs in the country difficult. As of December 2009, there are 659 GOCCs, 485 or 73.6% of which are local water districts. Thus, fiscal performance monitoring in the past has been confined to 14 major corporations whose financial position would have significant impact on public sector borrowing requirement. 3

Prepared by Shimz R. Manaois-Battung in consultation with Director Dina de Jesus-Pasagui and CPBRD OIC Director General Romulo Emmanuel Miral, Jr. The views, opinions, and interpretations in this report do not necessarily reflect the views of the House of Representatives as an institution or its individual members.

1 In 2007, the government almost balanced the budget primarily due to revenue gains from the RVAT. The ensuing years saw

deterioration in government’s tax effort resulting from tax policies whose main intentions were to grant tax relief to individuals and corporations to further encourage productivity. Moreover, there are existing measures that have yet to be corrected such as redundant fiscal incentives and non-indexation of excise taxes to inflation. Government’s efforts to pump-prime the economy and provide social safety nets following the financial crisis in 2008 also weighed down on the fiscal position.

2 By convention optimal spending would mean benefiting as much people as possible at least costs and minimal losses/wastage. 3 The 14 monitored GOCCs include the Home Guaranty Corporation, Light Rail Transit Authority, Local Water Utilities

Administration, Metropolitan Waterworks and Sewerage System, National Development Company, National Electrification Administration, National Food Authority, National Housing Authority, National Irrigation Administration, National Power Corporation, Philippine Economic Zone Authority, Philippine National Oil Company, Philippine National Railways, and Ports Authority.

2

This paper, which focuses on the financial performance of GOCCs, is organized as follows: the first part discusses the nature of GOCCs and the rationale for performance assessment; the second part describes commonly-used financial ratios while the third part presents a comparative analysis of GOCC financial performance across time. For the analysis portion, financial data of corporations belonging to public utilities, area development and regulatory sector (Cluster B) covering the period 2007 to 2009 as presented in the Annual Financial Report of the Commission on Audit (COA) were used.

NATURE OF GOCCS

State-owned enterprises (SOEs) around the world are mostly resource-constrained, financially and physically, yet they are called upon by their governments to deliver better services to more people at lower prices [ADB 2007]. Likewise in the Philippines, government-owned-and-controlled corporations (GOCCs) face a dual burden – i.e. that of providing goods and services at reasonable price, while raising their own revenues to finance operating expenses and leave a reasonable income/profit, if possible. In general, government corporations exist for the following reasons:

Natural monopolies. Goods and services that are considered natural monopolies e.g. water

services, electricity, mass transportation require very huge capital that competition among different players may not be possible. And when there is only one provider of good/service, chances are that prices would be uncontrollably high. Moreover, monopoly breeds inefficiency since the incentives to improve, innovate, diversify and economize are absent. GOCCs are a means by which the government can intervene when the market fails.

Protection of the disadvantaged, vulnerable and poor. The poor cannot compete fairly in a free

market due to resource constraints, thus GOCCs are created to provide certain goods/services at socially optimal prices (e.g. rice, housing, healthcare services, etc.).

Socio-economic growth and development. Due to their profit-maximizing nature, private firms cannot be relied upon to engage in projects (e.g. irrigation, road network, education, etc.) which have widespread externalities or socio-economic impact. GOCCs are therefore necessary to fill in the gaps left by the private sector. They help stabilize the economy through the exercise of their supervisory, regulatory and police functions.

However, the existence of too many GOCCs has several drawbacks. One, GOCCs tend to crowd out private enterprises since the former are given preferential access to credit because of government guarantees. GOCCs can also under-price their services, unlike private corporations which are mostly profit-oriented. Two, GOCCs provide low returns on investments, especially those with social mandates. Lesser pressure is also placed on these corporations since the national government subsidizes a large part of GOCC operations and capital investments. And three, they create opportunity cost – i.e. foregone resources in terms of tax exemptions and government subsidies to losing corporations could have been channelled to high-yield investments instead.

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ASSESSING GOCC PERFORMANCE

Existing literature provide substantial resources / references for performance evaluation of state- owned corporations. Measures of performance may vary by country and by income, depending on the availability of or access to data / information. Typical measures would include financial ratios, economic returns and social impact. A more comprehensive evaluation of performance requires a combination of all measures, including a review of corporate structure, systems and processes, internal control measures, etc. Given the dual nature of GOCCs - public service and profit-maximization – using just one type of performance measure would naturally result to biases. But due to the number of corporations involved and the complexity/diversity of their operations, it would be difficult to undertake an holistic much less regular performance review of the entire public corporate sector. Thus, this paper will only focus on the business/financial side of GOCCs, i.e. temporarily setting aside the socio-economic impact. Since GOCCs are designed to be operationally independent, their financial condition is crucial for the following reasons: (a) it determines the viability and eventually capacity of GOCCs to respond to their societal goals, (b) it affects operating performance and the quality of their services and most importantly, (c) it impacts on the fiscal position of the national government. On the positive side, earning GOCCs are required to pay dividends4 while losing corporations are a drain to state resources in terms of subsidy, advances, additional equity infusion and at times even bail-out or debt absorption.

FINANCIAL RATIOS

There are conventional financial analysis techniques/tools that may be used to measure performance. In particular, the balance sheet and income statement5 present a picture of GOCC profitability and stability. Basic information that may be derived from the balance sheet includes the size and growth of assets, liabilities and capital while the income statement gives an idea on the sources of income, cost-efficiency and profitability of an organization. Financial ratios – or mathematical relationships among assets, liabilities, income and equity - may be used to benchmark GOCC operations. The financial ratios that are most relevant to GOCCs are the current ratio, return on assets (ROA), return on investment (ROI), debt-worth ratio, debt-to-asset ratio and personal services expenditures-to-income ratio. The current ratio – derived by dividing total current assets by total current liabilities – measures a corporation’s liquidity or financial strength (see Table 1). It provides information on whether the current assets of a corporation will be able to pay its current liabilities as scheduled with a margin of safety. Hence, the number of times current assets exceed current liabilities is a valuable expression of a business or a corporation’s fund adequacy or solvency. For instance, a corporation with a current ratio of two (2) means that for every thousand liabilities it owes, its assets are capable of paying these liabilities two times without putting its daily operations at financial risk. Too high current ratios however are also not desirable as this could mean that a corporation does not utilize its cash optimally. Optimal use of cash could mean investment in activities with potential high yields (e.g. purchase of equipment, land properties, etc.). As a rule of thumb, current ratio should be equal to 2 or better.

4 Under RA 7656, GOCCs are obliged to remit at least 50% of their annual earnings as cash, stock or property dividends to the

national government. Exempted from this rule are those that are in the business of administering real or personal properties or funds held in trust for the use/benefit of their members e.g. GSIS, HDMF, ECC, OWWA, PMCC.

5 The balance sheet shows the state of a going concern as of a certain period while the income statement shows the financial operation during a specific timeframe.

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Return on assets (ROA) is derived by dividing net income by total assets. It determines a company’s level of efficiency in resource management as well as asset strength. A high ROA suggests efficient management of assets while a low ROA suggests inefficient management.

Box 1. Financial Statement Accounts

Assets are items of commercial values which are owned by a particular GOCC. They are generally classified into current, long-term and other assets. Current assets are those that are easily convertible into cash within one operating cycle - normally one year. They are usually listed in the order of their liquidity, e.g. cash, receivables, inventories, prepayments, and short-term investments. Long-term assets are those that are not easily convertible to cash, e.g. plant, property and equipment, land and land improvements, buildings and structures, etc. Other assets may consist of patents, other intangibles, deferred charges and capitalized losses6. Liabilities represent the claim of creditors over the assets of the GOCC. Current liabilities are obligations that are payable within the year, e.g. due from regular suppliers, payroll liabilities, unpaid taxes, unpaid utilities, etc. Conversely, long-term liabilities are those whose settlement extends beyond the year of operation e.g. notes payable, mortgage, bonds and loans. Equity is the owner’s share in the assets of the GOCC; it is also referred to as the net worth or the value of its assets less its liabilities. If GOCC assets are greater than its liabilities (A>L), the GOCC is said to have a positive equity. But when liabilities exceed assets (A<L), the GOCC has a negative equity. Variables like share capital, retained earnings, donated capital and surplus reserves are among the variables that affect government equity. GOCC income consists of business and service income, gains and premiums, proceeds from the sale of assets and other income. Like other government agencies, GOCCs engage in the provision of public goods/ services except that the latter charge user fees – usually at subsidized cost. The ability of a GOCC to put a price on goods/services determines its capacity to generate revenues, pay for maintenance costs and service its debts.

ROAs differ by industry. Some corporations may require higher assets (asset-intensive) resulting in lower ROAs while corporations engaged in industries that require lower assets (asset-light) may have relatively higher ROAs. Various accounting textbooks apply the general rule that anything below 5% is more asset-intensive (e.g. infrastructure businesses like railroads and telecommunications, or manufacturing industry that requires specialized and expensive machineries and equipment) and anything above 20% is less asset-intensive (software companies, advertising firms or industries that do not heavily rely on expensive equipment). In terms of interpretation, a corporation with a 20% ROA means that it could generate 0.20 centavos of profits for every P1 worth of asset. Owing to their dual role of societal obligation and profit maximization, GOCCs have to recover cost without jeopardizing public welfare. Intuitively, GOCCs that impose fees and charges should post high ROA while those in the socio-civic activities or those with missionary functions/mandates would have lower returns. While academic literature does not suggest any

6 These are losses which are not charged against current income/revenue. In the 1990s, heavy losses in operations by the old Central

Bank were capitalized i.e. temporarily parked under asset section and to be credited against future incomes. Later, these capitalized losses (assets) were transferred to the national government in exchange for equity infusion (capital) to the new Bangko Sentral ng Pilipinas (BSP).

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standard or ideal ratio for bad or good ROA, this measure can be used to compare similar industries.

Return on investment (ROI) is considered one of the best measures of a company’s profitability. ROI is derived by getting the ratio of net income to owner’s equity/net worth. This ratio is an indication of the worthiness of the investments put into the company or business. A very low ROI suggests either poor management performance or a highly conservative business approach. A very high ROI on the other hand indicates that the company either manages the business well or is undercapitalized. A rule of thumb is that around 10% to 14% of ROI is needed in order to fund future growth.

TABLE 1 DEFINITIONS AND USES OF FINANCIAL RATIOS

Ratio Derivation Purpose

Rule of Thumb

Current Ratio

Total Current Assets

divided by Total Current Liabilities

Measures liquidity or financial strength

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Return on Assets

(ROA)

Net Income divided by

Total Assets

Measures level of efficiency in resource

management

no ideal/standard ratio but can be used to compare

similar industries/GOCCs

Return on Investment (ROI)

Net Income

divided by Owner’s equity/Net Worth

Measures profitability 10% to 14% is needed to

fund future growth

Debt/Worth Ratio

Total Liabilities

divided by Owner’s Equity/Net Worth

Measures solvency

0.5 - 0.8 i.e. debt should be

between 50% to 80% of equity.

Debt Ratio Total Assets divided by

Total Liabilities

Measures the extent of reliance on debt

no standard ratio but 1

indicates bankruptcy

The debt/worth ratio (or leverage ratio) measures a corporation’s solvency, i.e. how dependent a business is on debt financing (or borrowings) vis-à-vis owner's equity. This ratio is computed by dividing total liabilities by net worth/equity. It indicates how much of a corporation’s business is owned and how much is borrowed (a debt/worth ratio of 2 means that for every peso of shareholders funds, the corporation owes two pesos to its creditors). This ratio focuses on a corporation’s ability to meet its long-term debt obligations such as bonds. For instance, if the liabilities of the corporation exceed its equity or net worth, then its creditors have more stake in the business than the shareowners. In other words, the higher the ratio, the greater the risks a corporation’s creditors assume while the lower the ratio, the greater the long-term financial safety for the corporation. In addition, corporations with low debt/worth ratio are more likely to have greater borrowing flexibility in the future while corporations with high debt/worth ratio are more likely to experience business/economic risk and have a greater propensity to default on their debt. A rule of thumb is that debt/worth ratio should be between 0.5 and 0.8, i.e. debt should be between 50% and 80% of equity for a corporation to be considered solvent. Another measure of financial leverage is the debt-to- asset ratio (or simply debt ratio) which indicates the extent of GOCC reliance on debt. Expressed as debt divided by asset, this ratio measures how much of a corporation’s capital is financed by borrowing. A debt ratio greater than one (1) means that its equity or net worth is negative, indicating bankruptcy.

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Given that all GOCCs are required to submit financial statements to the Commission on Audit, these documents (as audited by the resident auditor and published in the Annual Financial Report) may be used to test the performance of major GOCCs over time, i.e. three to five years.

FINANCIAL PERFORMANCE (GOCCS IN CLUSTER B)

GOCCs are grouped according to their functions and activities. Cluster A GOCCs are those responsible for the formulation and implementation of policies in the areas of money, banking and credit towards the promotion of balanced and sustainable economic growth. Cluster B mainly consists of public utilities corporations and those in charge of industrial and area development and other regulatory functions. These GOCCs are responsible for ensuring adequate and affordable supply of oil, energy, water, housing as well as efficient transportation and postal services, among others. Cluster C GOCCs are those that are accountable for the promotion and development of policies and implementation of projects related to agriculture, trade, science and socio-cultural and civic activities. On average, total assets of GOCCs belonging to Cluster B make up about 8% of the country’s gross domestic product from 2007 to 2009. In terms of impact on national government resources, GOCCs under Cluster B received the largest subsidy totalling P18.49 billion during the same period. This amount is three times higher than the subsidy given to Cluster A (banking, finance and insurance) and 60% higher than that extended to Cluster C (agriculture, trade, science, socio-cultural and civic activities). Further, Cluster B GOCCs that ran deficits in all these years recorded a total of P34.5 billion, more than thrice lower than the total deficit posted by Cluster A GOCCs and 34% lower than that recorded by Cluster C GOCCs. Asset Accumulation. Out of 44 to 56 corporations which submitted audited financial statements, the BCDA, PPA, MWSS, LRTA, Water Districts, SBMA, NHA, PRA, MIAA and NEA have consistently been at the top ten (10) in terms of total assets (see Table 2). Almost all except NEA and MWSS registered increases in assets ranging from P520 million to P16.7 billion between 2007 and 2009.

TABLE 2

TOP TEN [CLUSTER B] GOCCS BY TOTAL ASSETS

(IN MILLION PESOS)

GOCCs 2007 2008 2009

Amount Rank Amount Rank Amount Rank

BCDA 98,669.36 1 102,587.40 1 115,420.20 1

PPA 90,694.38 2 91,958.88 2 93,652.95 2

MWSS 60,447.48 3 57,832.32 3 56,119.97 3

LRTA 46,349.30 4 51,176.35 4 53,299.01 4

Water Dist 30,824.45 5 36,336.69 5 40,398.10 5

SBMA 29,557.13 6 29,289.06 8 30,393.18 8

NHA 29,454.28 7 33,859.60 6 37,221.84 6

PRA 29,030.44 8 29,744.06 7 30,740.14 7

MIAA 26,406.94 9 26,997.04 9 26,926.63 9

NEA 18,008.52 10 19,456.70 10 17,698.71 10

Source of Basic Data: COA Annual Financial Report (AFR) for GOCCs, various years

As shown in Table 3, the bottom ten GOCCs by total assets vary due to late submission or non-submission of financial reports to COA.7 Consistently listed among asset-light corporations are

7 2008 and 2009 figures are based on the 2009 COA AFR whereas 2007 figures are derived from the 2008 COA AFR.

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NSLC, GYREI, TABASCO, PRC, NSW, NTFC and PMPC. The other GOCCs that went to the bottom 10 in 2007 are NPCTI, KRC and PDMC. Meanwhile, IIGSI, FCIEI and LINSI were among the GOCCs that had the lowest asset values in 2008 and 2009. Of all the GOCCs whose asset data are comparable across time, only three – NSLC, TABASCO, PMPC- posted increases, albeit minimally, of less than one percent to three percent. In nominal terms, asset growth ranged from P37,000 to P392 million. The rest of the GOCCs registered decreases in assets of between P75,000 to P300 million.

TABLE 3

BOTTOM TEN [CLUSTER B] GOCCS

BY TOTAL ASSETS, IN MILLION PESOS

GOCC 2007 2008 2009

NSLC 13.00 13.21 13.39

GYREI 9.65 9.70 9.69

TABASCO 8.21 8.29 8.39

NSW 2.82 2.77 2.72

PRC 2.85 2.64 2.62

NTFC 2.29 2.15 1.99

PMPC 0.66 0.68 0.70

PDMC 0.66

KRC 11.85

NPCTI 18.38

IIGSI 17.41 14.70

FCIEI 13.33 13.22

LINSI 2.37 2.29

Source of Basic Data: COA AFR for GOCCs, various years

Accumulation of Liabilities. The LRTA, BCDA, MWSS, NEA, Water Districts, PRA, PPA, LWUA and SBMA were found to have the largest amount of indebtedness during the period 2007-2009 (see Table 4). The liabilities of these GOCCs have grown from P172.7 billion in 2007 to P226.5 billion in 2009 or approximately an increase of 30%. On average, the total liabilities of these GOCCs alone comprise around 78% of total liabilities of all GOCCs in Cluster B.

TABLE 4

TOP TEN [CLUSTER B] GOCCS BY TOTAL LIABILITIES (IN MILLION PESOS)

GOCCs 2007 2008 2009

Amount Rank Amount Rank Amount Rank

LRTA 44,141.15 1 60,827.36 1 64,422.25 1

BCDA 24,889.07 2 36,716.35 2 42,503.24 2

MWSS 20,772.66 3 23,873.74 3 21,884.73 3

NEA 17,971.83 4 18,666.78 5 16,527.95 6

Water Dist 16,476.22 5 19,899.66 4 21,423.19 4

PRA 14,967.49 6 14,574.35 7 17,863.13 5

PPA 11,695.84 7 15,144.13 6 16,087.50 7

LWUA 11,654.87 8 11,207.50 10 11,809.44 10

SBMA 10,149.79 9 12,519.33 9 13,934.54 9

MIAA 8,437.76 10

NORTHRAIL 12,969.24 8 14,671.06 8


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Northrail was included among the top ten GOCCs with large amount of liabilities - at P13 billion and P14.7 billion in 2008 and 2009, respectively. MIAA which placed 10th in 2007 moved down to 11th slot the following year. From 2007 to 2009 the Authority's total debt rose by P1.2 billion increased by about 15%. The GOCCs with least financial liabilities from 2007 to 2009 include NSW, PMPC, TABASCO, PRC, GYREI and ASADI (see Table 5). On average, the combined liabilities of these six (6) corporations amounted to P4 million which is a very meager share (0.002%) in total GOCC liabilities of the entire sector. Further comparison with other GOCCs posting small amounts of liabilities (MRHI, PDMC, PEATC, BLCI, NPIC, PDGCC and MGC) cannot be made due to limited data/non-submission of financial statements.

TABLE 5

BOTTOM TEN [CLUSTER B] GOCCS

BY TOTAL LIABILITIES, IN MILLION PESOS

GOCC 2007 2008 2009

NSW 2.43 2.44 2.46

PMPC 1.53 1.55 1.56

TABASCO 0.12 0.14 0.15

PRC 0.08 0.14 0.07

GYREI 0.07 0.05 0.05

ASADI 0.01 0.36 0.12


Equity Accumulation. Table 6 presents the equity of top ten corporations which on average, constitute 92% of total equity of all GOCCs belonging to Cluster B. This could either mean: (a) NG subscription or capital payments to these GOCCs are high, or (b) they have significant retained earnings or accumulated profits from prior years’ operations.

TABLE 6

TOP TEN [CLUSTER B] GOCCS BY EQUITY

(IN MILLION PESOS)

2007 2008 2009

GOCC Amount Rank Amount Rank Amount Rank

PPA 78,998.55 1 76,814.74 1 77,565.45 1

BCDA 73,780.29 2 65,871.09 2 72,916.98 2

MWSS 39,674.83 3 33,958.59 3 34,235.24 3

NHA 22,125.36 4 26,403.78 4 28,377.01 4

SBMA 19,407.34 5 16,769.73 6 16,458.63 7

MIAA 17,969.18 6 17,044.80 5 17,261.30 6

Water Districts 14,348.24 7 16,437.03 7 18,974.90 5

PRA 14,062.96 8 15,169.71 8 12,877.01 8

PNOC-EC 6,748.20 9 9,802.24 9 10,003.39 9

LWUA 5,332.48 10 5,567.91 10 5,809.62 10

Source of Basic Data: COA Annual Financial Report for GOCCs, various years

On the other hand, there are about nine (9) GOCCs that posted negative equity during the period 2007-2009 (see Table 7). From P601 million in 2007, equity deficiencies of these GOCCs

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worsened to almost a billion in 2009. Equity goes down or decreases when assets decrease assuming that liabilities remain constant or unchanged. If the value of assets is unchanged and liabilities increase/exceed assets, then equity likewise goes down/turns negative. A number of circumstances may cause equity to decrease or turn negative including but not limited to operational losses, decrease in assets and increased borrowing.

TABLE 7

[CLUSTER B] GOCCS WITH EQUITY DEFICIENCIES

(IN MILLION PESOS)

GOCC 2007 2008 2009

PDA -354.12 -387.16 -593.95

BTPI -143.44 -223.17 -298.88

NPCTI -57.79 -57.41 -56.97

NSLC -12.17 -4.59 -4.39

NTFC -32.74 -32.89 -33.04

PMPC -0.86 -0.87 -0.86

PDMC -0.86

IIGSI -56.76 -59.15

LINSI -9.85 -9.96


Current Ratio. Most of the GOCCs that underwent COA review from 2007 to 2009 obtained a current ratio of two or better – i.e. 24 out of 44 GOCCs (54.6%) in 2007; 39 out of 56 (69.6%) in 2008; and 36 out of 54 (66.7%) in 2009. Thus, it may be construed that more than half of the corporations involved in public utilities can meet their near-term operating needs sufficiently. A caveat, however, is that this measure should not be taken as the single determinant of financial performance as some GOCCs with high current ratios failed to generate net income before subsidy (see Table 8). While these corporations may be able to pay their short-term obligations on time, they could also face the risk of not growing the business – that is, assets are not translated into long-term revenue or income. For instance, ASDI, NSW, NTFC, PEATC, ZCSEZA have consistently reported high current ratios while incurring net loss of about P100,000 to as much as P66 million. By contrast, some GOCCs posted surpluses despite low current ratio - as in the case of PHILSUCOR, PPMC, NDC and PPA. Return on Assets. Listed in the upper portion of Table 9 are the GOCCs which are considered asset-intensive or those that require high assets resulting in low ROAs (less than 5%). In 2007, 23 out of 44 GOCCs or 52.3% posted net income after tax and before subsidy of between P1,000 to P2.7 billion even as their assets ranged from P700 million to P93.7 billion. A lesser proportion of GOCCs – 19 out of 56 or 33.9% - registered low ROAs in 2008 only because some corporations were not included in COA AFR for the year specifically (BCDA, CEZA, LRTA, MWSS MIAA, PPA, etc.). For 2009, 25 out of 54 (46.3%) earned income of P2,000 to about P1 billion but posted ROAs of less than 5%. Among the GOCCs with ROAs greater than 5%, the NSLC and PNOC-EC stand out with 57.4% and 22.8% return on assets, respectively in 2008. This suggests that PNOC-EC was better at converting its investments in 2008 than in 2007 and 2009. On the other hand, NSLC while posting a high ROA of 57.4% in 2008, its record in 2007 and 2009 were actually below 5%. In the case of water districts, the ROA during the period averaged 4.7%. This means that for every P100 worth of asset, water districts are only able to generate around P5 profit.

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Unfortunately, a large number of GOCCs under this cluster registered negative income during the period. In 2007, 15 corporations representing 34% of total were in the red while 50% (28) and 39% (21) of Cluster B GOCCs similarly posted revenue losses in 2008 and 2009, respectively.

TABLE 8

CURRENT RATIOS AND NET INCOME (LOSS) BEFORE SUBSIDY OF CLUSTER B GOCCS

(IN MILLION PESOS)

2007 2008 2009

GOCC Current Ratio Net Income

Before

Subsidy

Current Ratio

Net Income Before

Subsidy

Current Ratio

Net Income Before

Subsidy

Losing GOCCs with current ratio greater than two (2)

ASDI 3,960.80 -2.66 104.99 -1.95 2,300.39 -1.63

BCDA 2.85 -6,692.94

CEZA 8.92 -118.59

CIAC 4.60 -52.53

FCIEI 3.37 -0.12 3.38 -0.10

JHMC 2.32 -14.23

LINSI 26.31 -0.11 21.84 -0.11

MRHI 3.17 -2.15

MWSS 2.77 -3,553.49

NHA 5.24 -803.77

NORTHRAIL 10.02 -819.81

NPIC 2.72 -4.78 23.92 -6.78

NSW 94.10 -0.01 61.51 -0.07 45.35 -0.07

NTFC 43.92 -0.32 41.10 -0.15 43.16 -0.15

PADC 2.42 -5.08 2.48 -13.78 2.60 -4.49

PAFC 68.14 -149.33

PEATC 65.26 -1.43 68.99 -1.59 40.36 -15.07

PRC 2.72 0.00

SPDA 32.12 -58.31 27.19 -54.80

ZCSEZA 6.48 -66.42 6.88 -68.66 10.28 -52.10

Earning GOCCs with current ratio of less than one (1)

CPA 0.94 203.51 0.81 184.84

LLDA 0.94 29.89

LRTA 0.95 35.83

NDC 0.55 417.27 0.80 209.76

PHILSUCOR 0.28 185.04 0.28 32.10 0.28 219.54

PPA 0.97 2,082.70

PPMC 0.51 5.62 0.13 0.35 0.10 2.36

PSTC 0.95 18.44


Return on Investment. Government corporations with ROI ranging between 10% and 14% are considered good performers and are assured of future growth. From 2007 to 2009, PEZA, PNOC-EC and PRA have constantly posted ROIs within the ideal range, albeit at a decelerating rate (see Table 10). Others that registered good return on investment are KRC, PDGCC and Philsucor (for 2008-2009), FSC and JHMC (2008) and NDC (2007). GOCCs that were considered profitable during the period, i.e. high ROIs with positive earned a profit averaging P6.2 billion. Debt/Worth Ratio. As explained earlier, corporations whose debt-to-net worth ratio is within 50% to 80% are considered financially viable. Based on COA report, at least 70% of all GOCCs had positive net income with debt ratio/worth ratios falling below 80% (see Table 11). Those that

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were not found to be in good standing - i.e. debt/worth exceeding 80% - include LRTA, LWUA, NDC, Northrail, PNOC-EC and Water Districts.

TABLE 9

RETURN ON ASSETS OF CLUSTER B GOCCS

(IN PERCENT)

2007 2008 2009

Asset-Intensive GOCCs, with net income>0 and ROA<5%

BCDA 1.58

BLCI 0.24 0.76 1.04

BMHI 1.24 2.36 0.59

CDC 2.07 4.35 1.83

CEZA 2.51 0.77

CPA 2.80 2.43

GYREI 1.71 0.75 0.65

JHMC 1.72

LLDA 2.37

LRTA 0.05

LWUA 0.73 2.20 0.39

MCIAA 4.81 4.43

MGC 1.86 0.87

MIAA 4.69 2.75

MRHI 4.91 1.66

MWSS 3.47 0.71

NDC 4.07 2.01

NHA 0.14 0.04

NORTHRAIL 1.06

NPCTI 2.24 2.15 2.38

NPIC 1.80

NSLC 4.52 1.53

PAFC 0.06

PDMC 2.91 2.73

PHILSUCOR 3.80 0.64 4.06

PMPC 0.15 0.29

PNL 3.86 3.20

PPA 2.98 1.64

PPMC 1.15 0.19

PRC 2.46 2.44

PSTC 1.66 1.38

TABASCO 1.43 0.86 1.00

Water Districts 3.68 4.89

GOCCs with net income>0and ROA>5%

JHMC 16.45

KRC 5.68 13.75

LLDA 5.81 6.91

MCIAA 5.63

NSLC 57.39

PDGCC 11.00 9.97

PEZA 14.19 6.39 6.95

PNOC-EC 13.70 22.79 13.32

PRA 5.98 9.10 5.03

Water Districts 5.38


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TABLE 10

GOCCS WITH POSITIVE (>) NET INCOME AND EQUITY

BY ROI, IN PERCENT

GOCC 2007 2008 2009

BCDA 2.12 0.85

BLCI 0.25 1.08

BMHI 1.84 3.31 0.85

CDC 3.07 7.81 3.33

CEZA 2.95 0.82

CPA 2.99 2.58

FSC 22.74

GYREI 1.72 0.76 0.65

JHMC 2.19 20.74

KRC 16.01 19.24

LLDA 8.45 3.04 8.20

LRTA 1.10

LWUA 2.31 6.62 1.20

MCIAA 5.04 4.68 5.88

MGC 1.87 0.87

MIAA 6.90 4.30

MRHI 5.40 1.79

MWSS 5.29 1.17

NDC 19.47 7.97

NHA 0.18 0.05

NORTHRAIL 73.71

NPIC 1.87

PDGCC 12.27 10.74

PDMC 3.94 3.68

PEZA 23.15 10.21 11.45

PHILSUCOR 23.89 61.70

PNL 4.11 3.39

PNOC-EC 26.21 31.16 17.98

PPA 3.43 1.98

PPMC 6.76 1.93

PRA 12.34 17.84 12.01

PRC 2.53 2.51

PSTC 7.03 5.44

TABASCO 1.45 0.87 1.02

Water district 11.57 8.13 10.42

PAFC 0.08


Table 11 also presents that at least four GOCCs, while posting positive net income, also incurred negative debt/worth ratio during the period because their liabilities exceeded their assets. The net earnings of NSLC during the period ranged from P200,000 to P7.6 million while PMPC and NPCTI net income averaged P100,000 and P500,000, respectively. Philsucor had negative debt/worth ratio due to equity deficiency in 2007 but its debt/worth remained extremely high in the next two years. Recurring negative net worth accompanied by weakening profits over the years could be a sign of concern for these GOCCs. What is more worrisome, however, is that there are losing GOCCs (net income<0) which have exceptionally high debt/worth ratio, i.e. more than 80%. Based on COA reports, the NEA and NSW had constantly topped the list of GOCCs with high debt / worth ratios and negative net

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TABLE 11

DEBT/WORTH RATIO OF EARNING [CLUSTER B] GOCCS (IN PERCENT)

2007 2008 2009

GOCCs with net income>0 and debt/worth ratio<80%

BCDA 33.73

BLCI 3.46 12.08 3.78

BMHI 48.52 40.30 45.13

CDC 48.44 79.74

CEZA 17.65 6.45

CPA 6.86 5.92

EXPOCORP 12.39 12.39

GYREI 0.72 0.51 0.56

JHMC 27.01 26.09

KRC 39.95

LLDA 45.41 27.97 18.70

MCIAA 4.93 5.71 4.33

MGC 0.50 0.46

MIAA 46.96 55.99

MRHI 9.99 8.17

MWSS 52.36 63.92

NHA 28.24 31.17

NPIC 4.28

PAFC 20.00

PDGCC 11.48 7.73

PDMC 35.63 34.79

PEZA 63.11 59.94 64.76

PNL 6.40 6.20

PNOC-EC 36.73 34.97

PPA 14.81 20.74

PRC 3.04 2.78

TABASCO 1.48 1.66 1.82

GOCC with net income>0 and debt/worth ratio > 80%

CDC 82.15

FSC 125.68

KRC 181.71

LRTA 1999.01

LWUA 218.56 201.29 205.31

NDC 378.60 296.27

NORTHRAIL 6832.81

PHILSUCOR 3626.25 1419.82

PNOC-EC 91.27 PPMC 486.22 921.69

PRA 106.43 96.08 138.72

PSTC 324.30 294.37

Water Districts 114.83 121.07 112.90

GOCC with net income>0 and negative debt/worth ratio (<0)

PMPC -176.71 -180.65

NSLC -206.83 -387.50 -405.08

NPCTI -131.80 -132.69 -133.69

PHILSUCOR -35143.89


earnings (see Table 12). During the period, NEA’s losses ranged from P171 million to P2.4 billion while that of NSW was around P5,000 to P66,000. On the other hand, reported liabilities for NEA and NSW averaged P17.7 billion and P2.4 billion, respectively.

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The twin problem of negative net worth and negative equity could be a serious concern as this indicates near bankruptcy for these GOCCs. This scenario likewise suggests that assets lose their values, hence, losing their capacity to be transformed into profits. Around eight (8) struggling GOCCs had exceedingly high negative debt worth ratios during the period. In particular, LRTA’s negative debt/worth ratio average was -604.7 while its losses ranged from P1.1 million to P12.4 million. The CIAC debt/worth ratio averaged -473.3 while that of PDA was at -253.5. In terms of profitability, CIAC posted net losses of between P53.1 million to P126.7 million while PDA lost from a range of P22.8 million to P48.4 million

TABLE 12

LOSING [CLUSTER B] GOCCS

WITH HIGH AND/OR NEGATIVE DEBT/WORTH RATIO

2007 2008 2009

GOCC with net income<0 and debt/worth ratio > 80%

FSC 141.68

KRC 164.97

NDC 430.31

NEA 51809.93 2363.10 1411.72

NORTHRAIL 22976.37

NSW 609.30 746.48 942.53

PPMC 1041.46

SBMA 84.66

GOCC with net income<0 and negative debt/worth ratio

LRTA -630.27 -579.17

CIAC -561.03 -385.53

PDA

BTPI -254.69 -174.55 -142.04

PDA -274.82 -291.66 -194.07

NTFC -107.00 -106.53 -106.03

LINSI -124.05 -123.02

IIGSI -130.67 -124.85

PMPC -178.61


Debt-to-Asset Ratio Simply called debt ratio, this indicator measures the extent of reliance on debt such that a percentage higher than one (1) indicates negative equity or possible bankruptcy. Table 13 lists the six (6) GOCCs which may be considered as technically bankrupt (i.e. BTPI, NPCTI, NSLC, NTFC, PDA, and PMPC) and yet they continue to operate. From 2007 to 2009, the combined equity of these GOCCs worsened from -P601million to -P988 million. Among the highly-indebted government corporations, two agencies relied heavily on national government subsidy. The LRTA received P783.7 million while PDA got P47.5 million in total assistance during the period.

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TABLE 13

[CLUSTER B] GOCCS BY DEBT RATIO, 2007-2009

GOCC 2007 2008 2009

BTPI 1.65 2.34 3.38

NPCTI 4.14 4.06 3.97

NSLC 1.94 1.35 1.33

NTFC 15.29 16.32 17.58

PDA 1.57 1.52 2.06

PMPC 2.30 2.27 2.24

PDMC 2.30

PHILSUCOR 1.00

CIAC 1.22 1.35

IIGSI 4.26 5.02

LINSI 5.16 5.34

LRTA 1.19 1.21


In addition to the 12 GOCCs listed above, about 20% of the remaining GOCCs have average debt ratios greater than 0.6. This means that many GOCCs are still at risk and that their continued operation could mean any of the following: (a) equity infusion; (b) outright financial assistance or subsidy; (c) advances; and (d) bail-out. Obviously, all of these options put a strain on NG position.

SUMMARY

Government corporations have dual roles: (1) they are mandated to fulfill societal goals through the provision of public goods and services including policy formulation, project implementation and missionary functions, and (2) they are expected to be financially-viable and self-reliant, i.e. finance their internal operations, produce income surplus and remit dividends to the national government. A holistic study on GOCCs would normally cover financial analysis, socio-economic impact evaluation and organizational/systems review. Due to time and resource limitation, this paper focused on the financial aspects of public corporations belonging to Cluster B or those involved in transportation, telecommunications, power/electrification, area development, etc. The paper provides a glimpse on their liquidity, solvency, profitability, efficiency in resource management and reliance on debt. This method of analysis could be used to analyze GOCCs Cluster A (financial) and Cluster C (agriculture, trade, socio-cultural activities, etc). Better yet, combined quantitative (financial and economic returns) and qualitative (governance factors) could be undertaken to obtain a more comprehensive or complete picture of GOCC performance. The financial position of each GOCC is crucial in gauging its financial viability – a necessary condition for continued operation and quality of public service delivery. In a country like the Philippines which is characterized by shallow capital markets and very modest market competition, the role of GOCCs will continuosly be important. Hence, there is a need to ensure that the resources being spent on state enterprises will not undermine the government’s overall fiscal condition. To improve GOCC performance, it is essential that oversight agencies, i.e. Congress, COA, DBM and the newly-created Governance Commission for GOCCs (RA 10149) maintain a close watch on these corporations.

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LIST OF ACRONYMS

ASDI

Alabang-Sto. Tomas Development,

Incorporated NORTHRAIL North Luzon Railway Corporation

BCDA

Bases Conversion Development

Authority NPC National Power Corporation

BLCI Batangas Land Company, Incorporated NPCTI National Precision Cutting Tools, Inc.

BMHI

BCDA Management and Holdings,

Incorporated NPIC

NDC-Philippine Infrastructure

Corporation

BTPI Bataan Technology Park, Inc. NSLC

National Stevedoring and Lighterage

Corporation

CDC Clark Development Corporation NSW National Slipways Corporation

CEZA Cagayan Economic Zone Authority NTFC

National Trucking and Forwarding

Corporation

CIAC Clark International Airport Corporation PADC

Philippine Aerospace Development

Corporation

CPA Cebu Port Authority PAFC PNOC Alternative Fuels Corporation

EXPOCORP

Philippine Centennial Expo 98'

Corporation PDA Partido Development Administration

FCIEI First Cavite Industrial Estate Inc. PDGCC

Palacio del Gobernador Condominium

Corporation

FSC Freeport Services Corporation PDMC

PNOC Development and Management

Corporation

GYREI GY Realty Estate, Inc. PEATC PEA Tollway Corporation

IIGSI Inter-Island Gas Services, Inc. PEZA Philippine Economic Zone Authority

JHMC John Hay Management Corporation PHILSUCOR Philippine Sugar Corporation

KRC Kamayan Realty Corporation PMPC

PNOC Malampaya Production

Corporation

LINSI Luzon Integrated Services, Inc. PNL Philippine National Lines

LLDA Laguna Lake Development Authority PNOC-EC PNOC Exploration Corporation

LRTA Light Rail Tansit Authority PPA Philippine Ports Authority

LWUA Local Water Utilities Administration PRA Philippine Reclamation Authority

MCIAA

Mactan Cebu International Airport

Authority PRC Pinagkaisa Realty Corporation

MGC Manila Gas Corporation PSTC

PNOC Shipping and Transport

Corporation

MIAA Manila International Airport Authority SPDA

Southern Philippines Development

Authority

MRHI Marawi Resort Hotels, Inc. SRA Sugar Regulatory Administration

MWSS

Metropolitan Waterworks and Sewerage

System TABASCO Tacoma Bay Shipping Corporation

NDC National Development Company

Water

Districts Water Districts

NEA National Electrification Administration ZCSEZA

Zamboanga City Special Economic Zone

Authority

NHA National Housing Authority PPMC Poro Point Management Corporation

no. 2011-06- financial evaluation of govt corp

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