SOEs, SOCBs, PPPs & The State Debt Obligations    

By Rusiripala Tennakoon –AUGUST 5, 2021

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.

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