Methodology for Financial and Governance Indicators

The scorecard method is a widely used technique for performance management evaluations. There is strong evidence that a scorecard helps improve profitability and provides guidance for management tasks, while identifying the problems impacting performance. Advocata’s scorecard on state-owned enterprises (SOEs) is a measurement of performance from both a financial and governance perspective.

Information on specific indicators pertaining to SOEs was collected and sourced as follows. Financial information was sourced using Annual Reports, Treasury Reports, and Department of Public Enterprises (PED) Reports from 2015 to 2020. Governance information was sourced using Annual Reports, Auditor General’s Reports, and responses to Right to Information requests filed by Advocata and other content from the SOE websites.

The selected Financial indicators are Turnover, Profit/Loss, Total Assets, Total Liabilities, Total Equity and Return on Assets of 52 strategic SOEs while the Governance indicators included evaluation of Annual Reports, Auditing Standards, Right to Information and Accessibility of Information of those SOEs.

The financial performance of the SOEs was assessed by Return on Assets (ROA). 

ROA is a financial ratio that shows the percentage of profit a company earns in relation to its overall resources. It evaluates how efficiently a company is able to generate profit with the assets it has available. It is calculated as follows:  

ROA = Net Income/Total Assets*100

SOE ROAs were compared against the government’s cost of borrowing. The effective interest rate at which the government borrows would be indicative of the cost funding the investment in the SOE and serves as a benchmark against which to measure performance. The comparison between the SOE ROA and the Effective Borrowing Cost of Government Debt seeks to highlight how efficiently the government funds have been utilised by the SOEs. 

The governance performance of SOEs are measured by four main indicators as mentioned above.  Sub-indicators were used to get a detailed perspective on governance  practices in these SOEs. 

Disclosure of Annual Reports is important to source the financial and non-financial information of SOEs which are maintained by state funds and should be transparent. SOE auditing and accounting standards as a common practice help to compare SOEs with stock market listed companies. The Sri Lanka Auditing Standard provides guidance on how the audit should be performed by an independent auditor of the financial statements of an entity.

Right to Information and Access to information ensures the core principles of good governance such accountability, transparency and participation. Thus, state run enterprises should have high quality and timely information available to the public. 

To conduct an evaluation, a coding scheme of “green, amber, red” was used to grade the indicators, representing good, average and poor, respectively. A weighted average score was calculated for each SOE by allocating equal weights to each main indicator. Each sub-indicator was given equal weight based on the number of sub-indicators under the main indicator. Weighted average scores for all main indicators were summed up to calculate a composite score for each SOE. 

For further information on the Methodology of the SOE Scorecard, please click here.