No sovereign guarantees for SOEs

The government has sent a clear signal to state-owned enterprises (SOEs) that it will no longer issue any sovereign guarantees to them to enable them to borrow.

The Minister of Finance, Mr Seth Terkper, who intimated the government’s position, said government guarantees would now be secondary and the government would take the SOEs off budget support in due course.

SOEs are considered to be any material investment by the state in any entity, be it a majority or minority shareholding.

The government is of the view that although SOEs enjoyed government guarantees, which add to the public debt stock, they did not it pay back neither did they capture and report contingent liabilities to the government.

Mr Terkper said although the government also owed some SOEs, particularly those in the energy sector, the net position could be in favour of the government when all liabilities and guarantees were taken into consideration.

The government has, therefore, taken the approach of helping to strengthen the books of the SOEs to enable them to stand on their two feet, saying “a strong SOEs sector is one that complements government’s efforts.”

Genesis of SOEs

Since pre-independence days, the state has operated businesses in diverse sectors of the economy. The establishment of State-owned enterprises (SOEs) got to its peak in the 1960s when the government at the time thought it wise to set up corporate entities to operate various types of businesses in all sectors.

By an act of Parliament or Legislative Instruments, many such businesses sprung up in the agricultural value chain, social and commercial services, utilities, banking and financial services, education, manufacturing, transport and infrastructure and so on. 

Their incorporation helped a great deal in providing a functioning economy and infrastructural base as a catalyst for economic development through job creation. Although some of the corporations are still around, many got divested under a Divestiture Implementation Committee as part of reforms to liberalise the economy, remove subsidies and embrace a market economy.

Others also took shelter under the Statutory Corporations (Conversion to Companies) Act, 1993 (Act 461) to convert to limited liability companies, with profit-making outlooks.

Being showered with a lot of government guarantees and subsidies has rendered many of the surviving entities unable to hold themselves together independently, as they had not learnt the rudiments of fending for self. 

SOEs, subsidies and public debt

If they had not been strategic national assets, the likes of Volta River Authority, Ghana Water Company Ltd, Electricity Company of Ghana, state media houses, Produce Buying Company and the Ghana Railway Company would have gone the way of the Abosso Glass Factory, Asutsuare Sugar Factory, Wenchi Tomato Cannery, Nsawam Cannery, Consolidated Diamond Company Ltd, Bonsa Tyres, Bolga Meat Factory, the Kumasi Jute Factory and the Ejura Farms.

These enjoyed tremendous government pampering through subsidies and could not stand on their two feet when the subsidies were withdrawn. For some, the raw material base was a challenge as others suffered the debilitating consequences of mismanagement, among many other difficulties

However, for the few SOEs left, the government still provides them with sovereign guarantees to enable them to secure credit from local and international finance institutions to prosecute projects. 

Although the guarantees sit on the government’s books and form part of the public sector debt, the guarantor has no choice because it is also exposed to the SOEs in a number of unmet obligations, such as dishonoured subsidies and arrears in releases towards goods, services and investments.

In addition to the huge number of civil servants on the government’s wage roll, public sector workers from these SOEs further bloat the size of public expenditure. The huge wage bill, which forms about 55 per cent of domestic revenues, means the state has very little fiscal space to support goods, services and investments. 

This has forced every government since the late 1970s to borrow from the domestic short end market to finance recurrent and capital expenditure. Development partners also lend to the government. The phenomenon can only set the economy in a spiral of fiscal conundrum.

New debt management strategy

To help manage the public debts, therefore, the government has spelt out a number of measures which have been sanctioned by the International Monetary Fund (IMF) from which the country is currently receiving technical assistance and current account support to stabilise the economy.

The so-called ‘home-grown’ policies has a comprehensive provision for debt management which includes a move to the longer end of the debt market, where five to 10-year bonds will be issued to replace the 91-day to two-year government treasuries.

The government has also served notice to SOEs that it won’t issue any sovereign guarantees to them any longer.

At a meeting with heads of SOEs and their board chairpersons or representatives, the Minister of Finance, Mr Seth Terkper, stressed that the government would put the provision of guarantees for loans for SOEs to the back burner and rather work with them to strengthen their books so that they could borrow on their own balance sheets.

The Public Financial Management Act, 2016 (Act 951) also clarifies how SOEs should capture such dealings with the government in their finances. It will either stand as liabilities on their books or be converted to equity to increase the state’s stake in them, similar to injecting fresh capital.

Mr Terkper explained that although the government would not issue such guarantees any longer, it would continue to strategically support the SOEs to prosecute their mandates successfully.

New schemes

The Infrastructure Fund is to mimic the model of the Chinese Development Bank (CDB) which has supported a number of Chinese SOEs, such as Sinopec, to become global giants. Ghana’s Infrastructure Fund, Mr Terkper intimated, would assume a similar role and directly fund the SOEs on commercial terms.

He explained the Infra Fund could also provide guarantees to SOEs to borrow to finance projects, thus taking a huge burden off the government debt book.

The country’s public sector debt currently stands at GH¢109.8 billion (US$27.8 billion) or 65.9 per cent of Gross Domestic Product (GDP) in July 2016. The new debt management policy appears to be making impact as the debt levels appear to be tapering off.

Exchange rate losses, however, are taking a toll on the debt to GDP ratio. Even though the ratio has reduced from the region of 70 per cent to the current 65 per cent, it could have been lower if the cedi had gained some grounds against the dollar.