The Tribune

• Policies to govern near-$800m guarantees, loans unveiled

• Drive to ‘rationalise’ subsidies equal to 1/6 of Gov’t spend

• SOE ‘financial governance now targeted for improvement

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government yesterday unveiled policies to govern a near-$800m portfolio of loans and guarantees to state-owned entities, a senior official saying: “One transaction could throw everything awry.”

Simon Wilson, the Ministry of Finance’s financial secretary, told Tribune Business that the “frameworks” for government lending to, and issuing guarantees on behalf of, state-owned enterprises (SOEs) and other agencies/departments effectively make formal much of what the Government is already doing in this area.

Confirming that the two policies focus on risk assessment and management, in a bid to protect the Government and Bahamian taxpayer against the possibility of default by all SOEs, he confirmed that they are also another element in the bid to “rationalise” annual subsidies granted to the likes of Bahamasair and Water & Sewerage Corporation that comprise around “one-sixth” of public spending.

Research by Tribune Business showed that the Government had, at end-June 2023, guaranteed some $384.1m in outstanding debt and borrowings on behalf of SOEs and other agencies. Of that sum, just under one-third or $160m relates to the Bahamas Mortgage Corporation.

Mr Wilson, meanwhile, said the Government has lent “close to $400m” to SOEs, of which 80 percent relates to Bahamas Power & Light (BPL), largely through assuming their legacy debts and standing in their place to repay lenders. When added to the existing guarantees, this means close to $800m in potential taxpayer liabilities now comes under the oversight of these policy frameworks.

Confirming that the policies have been crafted in accordance with the Public Debt Management Act 2021’s legal requirements, Mr Wilson said: “We apply these measures now. The only issue is that best practice says it needs to be documented. 

“It’s applied now, but best practice says it has to be documented. In some cases it enhances our procedures, it’s the appropriate thing to do in this environment. Lenders expect these documents to be on your website. They expect you to be fiscally prudent. It’s all part of our continuing strategy to rationalise support for SOEs.”

The financial secretary added that it was “very, very important” to enhance financial controls and oversight of SOEs and other agencies because “one SOE could throw the whole structure awry. One. One transaction from any SOE could throw everything awry, off-target”.

The Government guarantee policy introduces a practice where SOEs and other entities that require this device, so as to give a lender comfort they will be repaid, have to pay a fee equal to either 0.5 percent or 1 percent of the sum involved to cover administrative and other costs.

“The guarantee comes with a cost,” Mr Wilson said. “Best practice says that the SOE should pay the true cost of the service, so there is an element there which says, ‘hey, if x,y,z state corporation comes in for a guarantee or a government business enterprise, you have to charge them for it’. It’s 0.5 percent or 1 percent of the amount being guaranteed. The fee is determined by the risk profile of the SOE.”

He added that the Government is increasingly being “asked to provide support to SOEs through guarantees, through direct lending, so these are very useful frameworks”. The Government, in its 2023-2024 Budget, is allocating $455.229m in collective taxpayer subsidies to the SOEs, such as the Public Hospitals Authority (PHA) and other entities, with this sum equal to 13.2 percent of total recurrent spending.

“One-sixth of our Budget goes to SOEs directly,” Mr Wilson said. “SOEs are a huge part of our financial commitments. Our target is to halt the growth in subventions and I think we’ve done that. The second part of the process is to improve the financial governance of SOEs. We’ve made some important steps this year, and that will lead to a natural decline in subventions to SOEs.”

As for direct government lending to SOEs, he estimated that this collectively stands at $400m with around 80 percent related to BPL. “The Government’s assumption of legacy debt is a big driver of lending to state-owned enterprises,” the financial secretary said.

Philip Davis KC, prime minister and minister of finance, in unveiling the policy frameworks, said: “The provision of loans and guarantees by the Government to in-scoped entities represents a fiscal risk to the Government should they fail to honour these obligations, which should be properly managed if we are to achieve fiscal resilience and public debt sustainability.”

Mr Wilson added: “It is prudent, therefore, for the Government to establish frameworks that would clearly define eligibility requirements, the decision-making process to be used in granting guarantees and loans, the risk mitigation measures to be employed by the Government, and those important post-decision follow-ups to ensure proper monitoring, recording and reporting of these activities.”

Outlining these risks, the policy documents state: “A guarantee is a legally binding undertaking given by a third party to assume responsibility for payment of a debt or performance of an obligation on behalf of a borrower to a lender under certain conditions— typically a default by the borrower.

“Where the borrower defaults on a financial or legal obligation, the lender has the right to ‘call’ or ‘invoke’ the guarantee, thereby requesting the third party to settle all outstanding financial obligations. A sovereign guarantee, therefore, is an explicit contingent liability where the Government is obligated under a legal agreement to make repayments and payments to the lender in the event of a loan default.”