Policy Research Institute - PRI Bangladesh

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Fiscal burden of non-financial state-owned enterprises: Imperative for reforms

Published: Wednesday, Sep 28, 2016


Posted : 28 Sep, 2016 00:00:00



Fiscal burden of non-financial state-owned enterprises: Imperative for reforms

Saeba Ruslana Abedin

Developments in the global economy raise three basic questions about government: what its role should be, what it can and cannot do, and how best to do it. According to World Bank's World Development Report: The State in a Changing World (1997), there have been both benefits and limitations of state action, especially in the promotion of development. Even where governments have succeeded in the past, many worry that they will not be able to adapt to the demands of a globalizing world economy. An effective state is vital for the provision of goods and services and the rules and institutions that allow markets to flourish. The state is central to economic and social development, not as a direct provider of growth but as a partner, catalyst, and facilitator.

Countries have established state-owned enterprises (SOEs) to develop strategic industries and compete in an increasingly globalized economy. Bangladesh is no exception. Despite worldwide extensive privatization, SOEs in many countries have continued and expanded. Many SOEs are some of the world's largest companies, investors and capital market players. But there is no guarantee that such intervention will benefit society. Government failure may be as common as market failure. The challenge is to see that the political process and institutional structures get the incentives right, so that their interventions actually improve social welfare.

State owned enterprises have underperformed continuously in Bangladesh with persistent losses and burgeoning debt commitments creating a huge burden on the country's budget. Bangladesh has forty six non-financial state-owned enterprises which are distributed under seven key sectors of industry, power, gas and water sector, transport and communication, trade, agriculture, construction and the service sector.

For the last decade, the SOEs have been suffering from significant losses. Table.1 shows the net profit/loss scenario of selected enterprises. BTRC (Bangladesh Telecommunication Regulatory Commission) has been earning the highest profits among the enterprises. Other profit making SOEs include the BOGMC(Bangladesh Oil, Gas & Minerals Corporation ), CPA (Chittagong Port Authority), CAA (Civil Aviation Authority) and RAJUK (Rajdhani Unnayan Kartripakkha). The net profit of all the non-financial SOEs stood at Tk. 44.54 billion in the fiscal year (FY), 2014-15. This has been possible mostly due to BTRC and BPC (Bangladesh Petroleum Corporation). In sharp contrast, four companies have chronically reported a net loss and substantial amount of bank loans, attributing to the bulk of the consolidated non-financial SOE net losses. They are BPC, BPDB (Bangladesh Power Development Board), BJMC (Bangladesh Jute Mills Corporation) and BSFIC (Bangladesh Sugar and Food Industries Corporation).

Fiscal burden of non-financial state-owned enterprises: Imperative for reforms

BTRC has a steady stream of income from granting licenses to telecom companies and the auction of the 3G airwave. BPC has been able to make profits in FY2014-15 owing to the gap between the lower world oil prices and the relatively higher domestic oil prices. The largest losses have been incurred by BPDB as it sells electricity to consumers at a price lower than it purchases at. There is a huge gap between bulk power tariff and power generation cost. This is caused mainly by costly power purchase from independent, rental and quick rental power plants to ensure uninterrupted electricity supply for the national grid. A generous amount of assistance has been given to BSFIC over the years to support their high sugar production cost. The import tax has been raised by 250% on raw sugar and by 163% on refined sugar by the National Board of Revenue (NBR) in August FY2015-16. Yet, BSFIC continues to run losses with large amounts of unsold refined sugar stocks and suffer from inefficiency. The consumers suffer the most as they have to pay a high price on sugar. Even after the shutting down of Adamjee Jute Mills, the government has had to support BJMC and pay most of its arrear bills, wages, retirement benefits, jute supply and refinancing. BJMC has also borrowed money from the state owned banks for running the mills. Though the exports of jute goods have improved in recent years, the jute sector is affected by rising cost of wages of workers and electricity and reduction in cultivation.

The government provided subsidy amounting to Tk.13.29 billion in FY14-15 and Tk.18.24 billion FY 2015-16 (till April) to 11 public entities. It is difficult to argue that the subsidies provided to the enterprises are justified given the quality of services they provide to the poor. Rural REB customers pay more for power than urban consumers, and pricing studies show that urban power and gas consumers are considerably subsidised. The water utilities also tend to serve middle and upper-income neighbourhoods better than the areas where the poor live. Bangladesh has one of the lowest tele-densities in the world, and the poor are hardly able to compete for the limited facilities. Slow development of the telecommunications systems compared to world-wide IT revolution, and inefficiency of the country's main port are some other hindrances to economic growth.

The public financial institutions have also had high percentages of non-performing loans (NPL) in their portfolios. In fiscal 2015, outstanding debt of SOEs and NPL of public sector banks stood at Tk 1920 billion and Tk 282 billion respectively. High levels of NPL have raised the costs of public banks because of provisioning requirements and, along with government reliance on savings certificates with very high rates of interest, have lead to high real interest rates. Considering Bangladesh's limited revenue mobilization capacity, the large fiscal costs associated with inefficient enterprises represent a major fiscal drain, which crowds out spending for more productive purposes.

Tanweer Akram, in his 1999 paper Privatization of Public Enterprises in Bangladesh: Problems and Prospects identifies that inefficient SOEs have resulted due to the lack of good management, an excess number of staff and higher wages than those justified by productivity; administered prices; absence of a competitive environment; continued budgetary support; and soft loans from public commercial banks.

Conflicting objectives of public enterprises prevent their management from securing maximum profits. There is a huge opportunity cost to using public resources to support loss-making enterprises. These resources could have contributed more to growth and poverty reduction if they had been devoted to infrastructure, human development services and social protection. The fiscal transfers are not recorded in a systematic, transparent manner with significant information gaps. The available data is generally of poor quality. Some SOEs acquire noncore assets and companies, saddling themselves with large debt burdens.

If privatization of SOEs is ruled out, then there is no option but to initiate reforms. World Bank's Corporate Governance of State-Owned Enterprises: A Toolkit.(2014)outlines a set of criteria for identifying SOEs that expose the government to large risks. These criteria focus on the government's involvement with the company, its financial and operational track record, the quality of the SOE governance, and its strategic importance to the government.

After proper identification of fiscal risks, the following steps may be taken by the government: A sound legal and regulatory framework for corporate governance of SOEs needs to be established. Developing a sound performance-monitoring system through the clear defining of SOE mandates, strategies, key performance indicators and targets, both financial and non-financial is extremely crucial. Measuring and evaluating performance with the goal of holding SOEs accountable for results and ensuring good performance needs to be undertaken. Financial and fiscal discipline needs to be promoted by reducing preferential access to direct and indirect public financing; identifying and financing the true cost of public service obligations; and monitoring and managing the fiscal burden and potential fiscal risk of SOEs. This can be supported further by independent external audits. The government should implement measures to oversee, limit, or monitor the debt accumulated by SOEs when the amount of overall public sector debt is a concern. Markets can provide useful independent metrics of the financial position and fiscal risk of SOEs by listing SOE debt or some company shares.

Finally, where appropriate, privatization of some public enterprises may be needed to be carried out. The most common rationale for retaining the SOEs despite their losses is that they provide employment. The SOE employees are not responsible for these losses, and if the Government reduces public SOE employment through retrenchment, closure or privatization, it has an obligation to provide reasonable social protection and other forms of assistance to workers who are laid off.

Business failures are as normal as successful ventures in developed countries, and entry and exit should be seen as normal market adjustment processes in developing countries like Bangladesh. Artificially maintaining unviable industrial sub-sectors such as public jute or sugar mills creates a variety of distortions which inhibit private sector led growth. Public utility sectors characterized by monopoly or near-monopoly situations, if privatized, will require strong independent regulatory frameworks, including appropriate pricing policies, in order to foster fair competition as well as to protect consumer interests.

[The writer is a Senior Research Associate at Policy Research Institute. saeba.ruslana@gmail.com]