Introduction

State-Owned Enterprises (SOEs) are vital to the Maldivian economy, playing a central role in employment, public service delivery, and infrastructure development. Despite this significance, many SOEs face chronic financial difficulties, including solvency issues and inefficiencies. These challenges often stem from a lack of transparency, operational inefficiencies, and over-reliance on government subsidies. These issues not only hinder profitability but also place a heavy burden on the government’s finances.

Our research investigated the impact of financial transparency on the profitability of Maldivian SOEs, focusing on whether improving transparency alone can drive financial sustainability. By analyzing financial reports, audit practices, and stakeholder interviews, we identified critical gaps and provided actionable recommendations to address these issues.

The Importance of Financial Transparency

Transparency in financial reporting ensures stakeholders—including policymakers, investors, and the public—can assess the financial health and governance of SOEs. It builds trust, fosters accountability, and helps identify inefficiencies or mismanagement. Transparency also attracts investors and international development partners, who rely on accurate financial information to allocate resources effectively.

Globally, studies have shown that transparency correlates with improved financial performance when coupled with robust governance and operational reforms. For instance, Chinese SOEs that embraced transparency reported reduced corruption and enhanced profitability. However, transparency alone may not lead to better outcomes without complementary governance structures.

Unique Challenges for SOEs in the Maldives

Maldivian SOEs operate in a unique environment, which presents several challenges to achieving financial sustainability:

1. Dual Mandate of Profitability and Public Service:
   • Many SOEs are tasked with balancing financial goals and public service obligations. For instance, regional ferry operators must serve remote islands, even when routes are unprofitable.
2. Dependence on Government Subsidies:
   • Government support often cushions inefficiencies, reducing incentives for SOEs to optimize operations or reduce costs.
3. Small Market Size:
   • The Maldives’ dispersed geography and limited population make it difficult for SOEs to achieve economies of scale.
4. Political Interference:
   • Political appointments and inconsistent governance practices hinder strategic decision-making and operational independence.

Key Findings from the Research

Our study analyzed financial data from 21 Maldivian SOEs between 2021 and 2023, supplemented by interviews with 28 stakeholders, including executives and board members. Key findings include:

1. Transparency Practices Are Limited:
   • While 79% of SOEs conduct annual audits, only 7% disclose financial reports to the public. Publicly listed SOEs showed relatively better transparency due to stricter regulations.
2. Timely Audits Are Not Sufficient:
   • Timely audits were not significantly correlated with profitability (ROA p=0.446; ROE p=0.196). While procedural compliance is important, it does not address deeper governance or operational challenges.
3. Audit Quality Matters:
   • SOEs with unqualified audit opinions performed significantly better, indicating that the reliability of financial reporting is critical. For instance, Maldives Ports Limited had a ROA of 6%, while Waste Management Corporation Limited reported a ROA of -27% due to governance inefficiencies.
4. Barriers to Transparency:
   • Resource constraints, political interference, and concerns about competitive risks were cited as major challenges.

Lessons from the Global Stage

Our findings resonate with global studies from organizations such as the Asian Development Bank (ADB), World Bank (WB), and OECD. Key lessons include:

1. Transparency Alone Is Not Enough:
   • ADB (2020) emphasizes that financial transparency is effective only when paired with governance reforms, such as board independence and audit oversight.
2. Balancing Objectives:
   • WB (2017) highlights that SOEs must align their commercial objectives with public mandates to avoid conflicts and inefficiencies. Without this alignment, transparency initiatives may fail to yield desired outcomes.
3. The Role of Accountability:
   • OECD (2022) suggests that transparency must be supported by accountability mechanisms, including regular performance reviews and external audits, to drive meaningful improvements in financial performance.

For small island economies like the Maldives, the interplay between limited market opportunities and public service obligations further complicates the equation, requiring tailored solutions.

Actionable Recommendations

To enhance financial transparency and improve SOE profitability, we propose the following measures:

1. Strengthen Governance Frameworks

• Uniform Governance Codes: Ensure consistent adherence to governance principles across all SOEs.
• Leadership Training: Equip executives and board members with skills in financial management and transparency.

2. Enhance Audit Practices

• International Standards: Adopt frameworks like IFRS to ensure accurate and comparable financial reporting.
• Independent Audit Committees: Establish committees to oversee audits and reduce political influence.

3. Leverage Technology

• Digital Reporting: Implement platforms for real-time financial disclosures.
• Centralized Systems: Use centralized data platforms to streamline reporting and reduce inefficiencies.

4. Policy Interventions

• Link Subsidies to Compliance: Tie government funding to adherence to transparency benchmarks.
• Simplify Regulations: Address regulatory barriers that hinder comprehensive financial reporting.

The Way Forward

Financial transparency alone isn’t a silver bullet for solving the profitability challenges of SOEs in the Maldives. However, when paired with strong governance, operational efficiency, and technological advancements, transparency can serve as a catalyst for meaningful change.

The Maldivian government and SOE managers must adopt a holistic approach to reform. This includes addressing governance gaps, leveraging technology, and fostering a culture of accountability. With these changes, SOEs can better fulfill their dual mandate of profitability and public service, contributing to the nation’s sustainable development.

Conclusion

Financial transparency offers Maldivian SOEs a pathway to enhanced profitability, accountability, and public trust. However, to unlock its full potential, policymakers and managers must address the underlying governance and operational challenges. With the right reforms, SOEs can set a benchmark for sustainable growth in small island economies, demonstrating the power of transparency as a catalyst for change.

---

References

Asian Development Bank (2020). Enhancing the Transparency and Accountability of SOEs.

International Monetary Fund (2021). Public Finance Transparency in Small Island Economies.

OECD (2022). Principles of Corporate Governance.

World Bank (2017). The Governance of State-Owned Enterprises: Republic of Maldives.

Zhang, Y., & Liu, D. (2023). Corporate Governance and Financial Performance: Evidence from Chinese SOEs.