By Rusiripala Tennakoon –
“Large amounts of debt obligations are likely to surface for Central Governments as many troubled state-owned enterprises (SOEs) and the state-owned commercial banks (SOCBs)will call for support through bailouts………”
This quote is from a World Bank Group report titled ‘Hidden Debt’, released in July 2021, highlighting the concealed aspects related to the risks exposed to by the Countries in the South Asian region with special focus on their heavy reliance in the SOEs, SOCBs and PPPs. AS we are aware, the region consists of the countries, Afghanistan, Bangladesh, Bhutan, India, Nepal, Pakistan, Sri Lanka and Maldives. The WB report focuses on the growing liabilities and the resulting effect on the accumulation of debt owing to the associated economic inefficiencies, signalling a possible Financial Crisis in South Asia while offering solutions to avert such a calamity.
In the context of the highly volatile situation faced by Sri Lanka, which has gradually developed into the current vulnerable state, further aggravating due to the ongoing COVID-19 crisis, and the serious attention focused by all concerned about the countries’ debt service problems, I wish to refer to this Report with particular emphasis on the diagnostics and the solutions offered with special emphasis on areas relevant to us. As it is a comparative study among all the countries in the region, it provides an opportunity to address the issues in that perception.
SOEs and SOCBs have been regarded as ‘headaches’ in our society crossing the thresholds of acceptable standards entering distress levels in their financial conditions as well as performance. In the case of SOEs they have become loss making burdens adversely affecting the State Balance sheets inflicting fiscal and economic costs to the governments. Even the SOCBs, despite the profitability they portray in their accounting displays, have to be often supported by public funds for recapitalization in addition to the spending for other corrective actions.
Response to the Pandemic situation and the consequences of limitations caused to normal economic activities have been the direct contributory factors leading to the difficult situation we are in, moving towards a revenue plunge. The SOEs and the SOCBs too, due to their inefficiencies, callous disregard of risk management, conflicting viewpoints between the managers and politicians (about the objectives), and corruption driven by politicians pursuing personal interests, have become severe burdens to the economy. However, they are required to serve the government’s endeavours to support the economy and in the relief measures to maintain livelihoods of the people. It has to be admitted that the SOEs and the SOCBs are much needed for the development activities and to help the government to address the market failures and improve social welfare. Although they are burdensome to the budget of the central govt. requiring capital injections with debt and equity bailouts more often than not, to keep them going, they serve as essential evils in societies like ours particularly being a developing country.
While it is true that our SOEs and SOCBs are sick and ailing for some time now, it is not an impossible task to turn them around with suitable spurs. It depends how serious are the policy makers to understand the underlying problems and genuinely support reforms that will pave the way for operations that do not advocate political self-interests. The mutual scratching of each other’s backs for side deals should be made harder for the perpetrators. Exposing the existing corrupt affairs are curtailed by authoritative actions and ostensible legal actions designed to suppress the increasing vulnerabilities.
It has been observed that corrupt elements in high positions use public monies to stop the un-covering and disclosures of their closely guarded secrets. Recently a Public Sector Bank in Sri Lanka instituted a series of legal actions against, Media stations, Trade Unions and Social Activists who came forward in Public Interest to disclose an ongoing fraudulent act wasting a huge sum of money towards a project violating the accepted procurement norms and provisions. The Bank spent a huge amount for prosecution, retention of highest paid lawyers costing millions of public money until the victims agreed to give up the legal battles in defending themselves due to their inability to bear the legal costs. Irony of the matter is the allegations levelled against the SOCB by those who were prosecuted by the bank were established as true in a subsequent Parliament COPE session initiated on the basis of Audit queries raised about the matter. The bank bosses admitted their fault as well as the huge additional spending before the COPE.
The Top ten SOEs account for over 90% of the total losses made by the sector in our country and even among those 3 or 4 entities are continuing to lead the accumulating losses over a period now. In this country all these loss making public institutions are conducting their financial operations with the SOCBs and have already created alarmingly high contingent liabilities for the government as off-balance sheet obligations. Most of the obligations of the Loss making SOEs are under implicit guarantees. In most cases the Treasury is providing some kind of documentary support enabling the SOCBs to justify the outstanding facilities to be kept in the current portfolio although according to regulatory requirements they have long qualified to be transferred and treated as Non-performing advances. There is no process or any accepted transparent policy guide line to account for the probability of such temporary guarantees becoming direct obligations of the government when triggered. Strangely our budget does not provide for these liabilities to be reflected transparently and to indicate the accruing obligations of the central government.
In our SOE sector the major focus is on 3 main entities. CPC (Petroleum Corporation), CEB (Electricity Board) and SriLankan Airlines. If we examine the authentic data of the related Financials relevant to our subject area, we see the following picture.
Borrowings of the CPC from the Banking Sector increased by 74.1 Billion (LKR)during the year to a total of Rs.381.8 Billion (in 2020). Value of Trade receivables of the CPC by end 2020, stood at Rs. 142.7 Billion, accounting for 89.2% of the total trade receivables due only from CEB and Sri Lankan Airlines.
The CEB recorded a loss of 62.6 Billion in 2020 while their short term liabilities to the banking sector (mainly SOCBs), the CPC and the Independent Power Producers figured at Rs.212.9 Billion(end of 2020). [It is reported that a 25% wage increase across the board is recommended to CEB employees in this situation: Our public exposures about a National Wage Policy has fallen on deaf years of the Policy makers. Local media was prevented from giving publicity to the Article under the influence by the advertisement providers from the SOEs and SOCBs]
SriLankan Airlines incurred an operating Loss of Rs. 30.9 Billion from April 2020 to Jan.2021. The revenue from SLA declined by 75.9%. According to previously published reports the total borrowings from the two State Banks, BOC and PB, amount to about Rs.70.0 Billion.
Here is a situation for any interested authority to examine whether the SOCBs involved have followed the Guide lines issued by the CBSL as the regulator under its directions based on banking Act no.3 of 2008. One of the SOCBs is keeping the overdue outstanding amounts due from SLA as current advances while the other has recently transferred the balances to NPL category. It is also interesting to note that the SLA has been able to reduce its operating expenditure by 58.4% recently, by following cost cutting measures such as re-negotiation of contract deals on Aircraft lease, employee related costs, suspension of non-essential service contracts etc.etc.
The position with regard to the SOCBs is no better. They are, nevertheless, highly successful in mobilizing deposits(owing to their government ownership), financial inclusion in digital payments, and facilitation of relief measures, particularly disaster related. This aspect has to be recognized as an important mission fulfilment of the SOCBs in terms of their objectives.
World bank report emphasizes the fact while addressing reform measures identified and recommended in their study, “public policy must lead it takes a concerted effort by society to ensure that the off balance sheet operations of government make sense and responsibly leverage public capital for the sake of more rapid and more equitable development…..”
Report summarizes those in respect of SOCBs as follows;
Purpose – To help create markets for the financial services by addressing market failures. Combine Social and Commercial objectives as far as possible.
Incentives – Establish Fiscal provisions to cover the market operating costs and risk taking needed to pursue legitimate objectives.
Transparency – Publicly disclose SOCB lending to and funding from SOEs together with the lending policy applicable to the loan portfolio within the audited financial statements of SOCBs.
[Government must move from cash based fiscal accounting standards toward actual accounting to disclose debt and contingency liability risks when those risks accrue and not when they materialize, to allow for adequate budgeting decision making and market response]
Accountability – The electorate, civil society organizations, industry associations ,media and financial markets must take the action to support reform that implements the PIT( purpose, Incentives, transparency)principles so that off-balance sheet operations of governments cannot be used for self-political interest or side deals -or at least make it harder to do so. Once the reforms are implemented all these actors must remain vigilant and active and keep testing the justifications for continuing off-balance sheet operations.
Among the many reforms proposed and recommended in the report some of the relevant areas to our situation are listed below;
1. The Boards of Directors for SOCBs and SOEs must be properly staffed to deliver a skill mix to effectively guide the SOCBs and SOEs in fulfilling the twin objectives of generating both profitability and developmental impact – possibly over longer horizons than commercial private firms.
2. Debt transparency and relevant data collection are critical to enable the government to pull together the big picture of how the SOEs and SOCBs shape the fiscal space and contribute to the overall Public Debt-including the accruing obligations on account of letters of Comfort freely issued by the Treasury.
3. Disclose the public policy and purpose of SOCBs and SOEs enforcing the need to publish the theory of change for fulfilling the objectives and purpose.
4. The Audit function area should encompass both financial and economic impact audits, and the Auditor General has a crucial role to play in ensuring the thoroughness and quality of these audits and proper functioning of the monitoring system.
In our country Auditors hardly pay attention to these. Accounting systems are so designed to conceal highly sensitive areas. The deficiencies in Loan loss Provisions and other Statutory obligations have remained a perennial problem sometimes causing national havocs. In 1990s the State Banks were declared insolvent due to this reason following an International Audit revelation. It is strongly conjectured that the same categories of provisions that lead to the commotion then are having the same defaults, showing only adjusted figures as the true provisions. Although the SOCBs are 100%owned and capitalized by the State, unusually excessive amounts un-paralleled in the State Sector are paid as salaries to Executives. In order to hide the information not only from the Public, even from the own staff, they employ outsourced companies to prepare their salaries.
SOCBs wish to keep the information as much as possible undisclosed. Social Activists fail to gain any space to publish articles highlighting these, due to the wielding power the SOCBs have over the Media to influence them using their huge advertising budgets not to publish those. Big shots in government prefer to continue the state of affairs rather than attending to the reforms. Policy makers of the government tend to avoid implementing system changes that involve attached conditions for reform. So, the caravan moves non-stop.
Our expectations and imaginations for a better system to be in place should not evaporate into thin air!