The Tribune

• 'Stress' relieving likely to widen to more SOEs

• September eyed for public pension reforms

• Gov't doubles support for BOB bail-out SPV

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Ministry of Finance's top official yesterday said the $5.7m allocated for "balance sheet clean-up" at two loss-making government agencies will likely "widen" in upcoming fiscal years to other state-owned enterprises (SOEs).

Simon Wilson, the financial secretary, told Tribune Business that a new line in the ministry's 2023-2024 Budget dedicated to covering what is termed "contribution arrears" at both the Bahamas Agricultural and Industrial Corporation (BAIC) and Broadcasting Corporation of The Bahamas (BCB) is the start of a broader initiative seeking to "recapitalise" SOEs and bring them into compliance with financial management laws.

Some $5.7m has been allocated to this effort, as it relates to BAIC and the BCB (ZNS), over the next fiscal year, with the same amount also budgeted for 2024-2025 and 2025-2026. Mr Wilson, meanwhile, also voiced optimism that legislation to reform public service pensions - including moving all new civil service hires to a defined contribution scheme, where they will contribute to their own retirement savings - could be ready for presentation to Cabinet by September this year.

Another new line item in the Ministry of Finance's 2023-2024 Budget is a $10m allocation for "employee pension contributions", and the financial secretary confirmed this sum is to cover the Government's share of payments on behalf of new hires as well as public sector workers "normally not covered" by a government pension such as weekly workers and local government staff.

As for the allocation to BAIC and ZNS' parent, Mr Wilson told this newspaper: "It's regular arrears that they have incurred over the years. We're trying to clean up all the arrears with a balance sheet clean-up for them. There's stress in their balance sheets, that's what it is. It's a combination of all sorts.

"Really what we want to do is get their balance sheets into a position where they have less liabilities. A lot of that stuff is inter-governmental, inter-corporation arrears. As we attempt to recapitalise these SOEs, I think you'll see more of that going forward. Generally, we want to put SOEs in a position where we recapitalise them and make them stronger entities.

"Starting with these two, next year you'll probably see it widen as we continue our recovery." The Government is aiming to slash taxpayer subsidies to SOEs by some $47m, or 7.5 percent, in the upcoming 2023-2024 fiscal year by cutting their allocations from a collective $492.24m in 2022-2023 to $455.229m in 2023-2024. The major reductions involve an $18m slash to subventions for the Water & Sewerage Corporation, and $10m cuts at the Public Hospitals Authority (PHA) and Airport Authority.

Mr Wilson, meanwhile, yesterday said the Government was also focused on ensuring SOEs, such as BAIC and ZNS, meet the new obligations imposed on them under the Public Finance Management Act when it comes to financial reporting. "We are preparing SOEs to transition under the new Public Finance Management Act," he added. "We'll provide them with the resources to function properly and meet their obligations in a timely manner."

Subsidies to SOEs have increasingly bled Bahamian taxpayers in recent years, and in the 2023-2024 Budget these are projected to account for more than one dollar out of every $10 spent by the Government on its recurrent or fixed costs.

The Prime Minister, addressing SOEs in his Budget communication, said: "We want our state-owned enterprises (SOEs) to succeed, and we are determined to improve transparency, efficiency and profitability in the way they operate. We have decreased the budget allocation for SOEs from the previous Budget.

"We will also issue clear expenditure guidelines to SOEs to ensure transparency and financial responsibility in the conduct of their businesses to ensure that it confirms with the national fiscal objectives. We will also implement a plan to increase revenue by collecting dividends from state-owned enterprises."

Elsewhere, Mr Wilson confirmed that the new $10m allocation for "employee pension contributions" relates to the proposed defined contribution plan that all new civil service hires will be placed on. "If we get the legislation passed this year, we will be in a position to start the defined contribution plan. That will be for new entrants," he added. "It's [the legislation] almost completed.

"We have to do some consultation with the public service unions. It's more so for new entrants, and persons normally not vested in a government pension plan. We have a number of government employees not participating; weekly workers, school Boards, livery services, worker for local government who are not normally pensionable.

"You have quite a few persons not normally pensionable. It's a challenge.. persons who work for 20, 25 and 30 years and get nothing when they leave. We have to get it finalised, drafted and consulted, and then it will be in a position to go to Cabinet hopefully by September this year. Hopefully."

The Government has long had its woes with unfunded civil service pension liabilities, which previous research by the KPMG accounting firm suggested would likely have reached $2bn by this stage without any reforms. Civil servants presently contribute nothing to their retirement, which are being funded by Bahamian taxpayers at the sum of $134.744m in the 2023-2024 Budget.

The IMF, in its Article IV report in 2018, agreed that the current system - where civil servants contribute nothing to funding their retirement - is “unsustainable”. And it called five years ago for “decisive measures.... to reduce debt”, singling out public sector pensions and health as two areas deserving close attention.

“The civil servants’ pension system is unsustainable,” the Fund warned. “Government employees draw pensions at retirement without contributing to the system while employed. Staff analysis in the 2016 Article IV Staff report noted that accrued government pension liabilities totaled $1.5bn in 2012, and would rise to $3.7bn by 2030 as the population ages.”

The IMF called for reforms that involve “moving to a contributory regime in the near term, and to a defined-contribution scheme in the medium-term”. This would require civil servants to contribute a portion of their salary to funding their retirement, rather than having this financed 100 per cent by the taxpayer through the Budget as is done currently.

The Ministry of Finance's Budget has also doubled the "provision" to cover the annual interest payments due to Bank of The Bahamas from the Bahamas Resolve bail-out vehicle from $2m this fiscal year to $4m in 2023-2024. The latter was created as the entity to which all the BISX-listed institution's most toxic loans were transferred to prevent it from collapse.

The whole this created in Bank of The Bahamas' balance sheet was filled by the injection of government bonds via a promissory note, of which $167m remains. The interest due on these bonds is supposed to be paid by Bahamas Resolve from the recoveries it generates by selling-off real estate and other collateral for the loans it had inherited, but Mr Wilson said this process is slowing down as it reaches the more difficult assets to offload.

"It's a temporary increase hopefully," he added. "I wouldn't say they're struggling a bit more to meet their obligations. Resolve meets its obligations through the sale of collateral; efforts that are ongoing. Obviously the obligation is significant and it's getting to the part of the portfolio which is more difficult. It may be that a bit more support is needed now."