‘White elephants’ bleed Bangladesh dry: SoE debt skyrockets to Tk6.4 lakh crore

While private firms face collapse from mounting ba debt, Bangladesh's state-owned enterprises (SOEs) operate under a different reality.

Shielded by continuous government bailouts, these entities perpetuate a cycle of inefficiency, pushing public debt to alarming levels and raising serious concerns about the nation's financial health.

A recent Finance Division report paints a grim picture: as of 30 June 2023, the combined outstanding debt of 101 SOEs and autonomous bodies had ballooned to a staggering Tk6,39,782 crore. This represents a 26% increase from the previous year, highlighting an accelerating fiscal drain.

Among these, 42 entities – primarily in the critical power, energy, fertiliser, and sugar sectors – are classified as high-risk, deemed incapable of repaying their government and institutional loans. A concerning 20 of these have already defaulted on their obligations.

These aren't nascent ventures; many are decades-old public sector behemoths, most consistently losing money, and some even entirely defunct.

A toxic mix: Inefficiency, overheads, zero accountability

Finance officials and economic analysts attribute this crisis to a "toxic mix" of chronic inefficiency, inflated operating costs, overlapping mandates, and a shocking lack of accountability. This combination has transformed many SOEs into what experts call "white elephants" – massive, unviable entities that consume public resources with no discernible returns.

"Rising loans to SOEs are straining government revenues due to persistent losses, inefficiency, and poor accountability," a senior Finance Division official, speaking anonymously, told The Business Standard. "The division has recommended halting new loans and guarantees and urged policy reforms for better governance."

Fahmida Khatun, executive director of the Centre for Policy Dialogue (CPD), echoed this sentiment: "Most of these entities turned into white elephants – unviable and draining public resources. With the government already facing financial pressure, continuing to fund such entities is a misuse of taxpayer money."

Tracing the debt: Billions held by troubled SOEs

The findings from the Finance Division's Monitoring Cell are particularly alarming. Out of the 101 entities reviewed, only two are categorised as "very low-risk," with 20 being "low-risk" and 37 "moderate-risk".

The real concern lies with the 42 entities in critical condition: 28 are classified as "high-risk" and 14 as "extremely high-risk." These 42 entities alone hold Tk3,13,187 crore in government loans and guarantees.

The debt carried by the high-risk group represents 1.67% of Bangladesh's GDP for FY2022-23, while the extremely high-risk group accounts for 3.13%. Given that the GDP was Tk44,90,841 crore in that fiscal year (according to BBS data), the Finance Division explicitly warns that these liabilities pose serious risks to future government revenues.

Govt on the hook for SOE defaults

A significant portion of the total SOE debt of Tk6,39,782 crore – specifically Tk2,70,267 crore – was directly borrowed from the government through Subsidiary Loan Agreements (SLA) and Loan Agreements (LA). These funds are often sourced from budgetary support provided by international development partners. 

The Finance Division's report explicitly warns that if these SOEs default on their loans, the liability will directly fall on the government.

Adding to the concern, long-term liabilities constitute 54% of the total debt, amounting to Tk3,45,482 crore – a level the report indicates could lead to serious financial risks for the government. 

Furthermore, 24 entities carry contingent liabilities totaling Tk18,591 crore. These are loans taken from third parties with the government acting as guarantor, meaning the state is obligated to repay if the institutions default.

Ballooning debt: A symptom of deep inefficiencies

CPD's Fahmida Khatun reiterated that the ballooning debt is a clear indicator of deep-rooted inefficiencies in SOE management. 

"Despite continued underperformance, successive governments failed to enforce a standard mechanism – either operate efficiently or shut them down," she told TBS. 

"Instead, they've been propped up with loans to stay afloat." She advocates for a drastic approach: "Enterprises that can't survive on their own should be closed or handed over to the private sector."

Recommendations for reform: Tighten controls, cut costs, manage debt

To mitigate the escalating fiscal risks from the SOE sector, the Finance Division recommends establishing a cautious and effective risk management framework. Key recommendations include:

• Regular monitoring and oversight: Implement stronger oversight and improved asset management to ensure financial sustainability and better resource utilisation.
• Cost recovery: Identify and address political, social, and technical barriers to cost recovery.
• Financial prudence: Advise reducing expenses, exploring alternative financing sources, and implementing cost-cutting measures such as boosting sales, increasing profit margins, and lowering operating costs.
• Pre-loan assessment: Conduct thorough assessments of financial and risk profiles of SOEs before issuing new loans or guarantees.
• Debt management: Each SOE must establish a loan repayment fund and adopt a clear debt management policy.
• Governance enhancement: Strengthen budgetary and internal control systems and encourage weak-performing institutions to seek alternative income sources.
• Policy framework: Recommend a comprehensive Public Service Obligation (PSO) policy and a unified legal framework for the SOE sector.

Power, sugar, and fertiliser firms dominate high-risk list

The list of "extremely high-risk" entities includes critical players like The Bangladesh Power Development Board and Maddhapara Granite Mining Company Limited, alongside Dhaka Leather Company Limited. Nine sugar mills also fall into this category: Shyampur, Joypurhat, Rajshahi, Natore, Kushtia, Mobarakganj, Pabna, Faridpur sugar mills, and Renwick Jajneswar & Co Ltd. The Bangladesh Road Transport Corporation and the National Tea Company Limited complete this dire list.

Sugar mill executives told the Finance Division's Monitoring Cell that soaring loan interest payments have inflated their production costs by a staggering 60% to 80%. They have urgently called for interest waivers and product diversification, citing positive socio-economic impacts in local communities as justification for continued operations. 

Data from the Management Information System of Bangladesh Sugar and Food Industries Corporation reveals a stark reality: out of 15 sugar mills it oversees, only Carew & Co Ltd is profitable, with the remaining 14 consistently incurring losses.

Among the 29 entities categorised as "high risk," six are sugar mills. The list also includes 13 companies from the vital power, energy, and fertiliser sectors, along with Chhatak Cement Factory, Atlas Bangladesh Ltd, Khulna Water and Sewerage Authority, Bangladesh Inland Water Transport Authority, Trading Corporation of Bangladesh, and Biman Bangladesh Airlines Ltd.

A senior official from the Power and Energy Division, who wished to remain anonymous, told TBS, "Many companies in the sector have been unable to collect dues from customers or receive government subsidies on time. As a result, they are increasingly relying on government support to repay loans – contributing to poor ratings in financial assessments."