Wednesday, July 26, 2017

SOEs cut public funding: NRGI report

Myanmar's state-owned enterprises (SOE) are contributing less to the government even as their revenues rise, while the Ministry of Finance has started work on devising them a better reporting system, according to a new report.

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SOE finances have long been shrouded in darkness. Even the Ministry of Finance has had difficulties obtaining complete reporting on the activities and expenditures of SOEs, according to a report from the National Resource Governance Institute (NRGI), who consulted with the ministry.

The report’s authors heard “statements by various government officials that the Ministry of Finance has only limited power to review the [SOE] accounts”, they said.

The ministry is stepping up its efforts, however, and has recently started working on new reporting formats to ensure it collects more detailed information on SOE income and expenditure, NRGI learned.

Patrick Heller, an author of the NRGI report, said he understood from conversations with the ministry that the new formats are part of the government’s wider public financial management reform process.

Further details were unavailable and the Ministry of Finance could not be reached for comment.

State enterprises have always made up a large chunk of public sector revenue, but in percentage terms their share is falling, according to the NRGI report.

In the 2009-10 fiscal year, SOE revenues accounted for 67 percent of public sector revenue, but the SOE’s share was expected to have fallen to 52pc in the 2014-15 year, according to the NRGI. The reason for the drop, however, is not that SOEs have fallen on hard times.

Since 2012, a series of government reforms have reduced the transfers SOEs have to make to the state, and in turn raised retained profits, NRGI said.

State-enterprises used to move all their net profits into a State Fund Account – 30pc as income tax and 70pc as “contributions”, the report said. They now typically retain around 55pc of their net profits, according to reports from the NRGI and the Extractive Industry Transparency Initiative (EITI).

Over the same period, SOE gross revenues have risen. Taking data from the International Monetary Fund’s 2013 Article IV Consultation, NRGI estimates that SOEs transferred 32pc of their gross revenues to the government in the 2009-10 fiscal year, and just 12pc in 2012-13 (see chart).

These same SOEs, however, still receive allocations from the national budget, which cover all their activity costs, the NRGI report said. Government officials indicated to the NRGI that a large majority of their costs were covered by the yearly budget allocation, according to the report.

The retained profits are mostly held in what are termed “other accounts”, and NRGI said it had confirmed with the Ministry of Finance that such funds are held “for the purpose of accumulation”.

The recently published Myanmar EITI report, which only looked at SOEs engaged in extractive industries, said that these accounts are held in Myanmar Economic Bank (MEB), and in the 2012-13 financial year were equivalent to 44pc of total budgeted revenue.

Myanmar Oil and Gas Enterprise (MOGE) deposited K1.3 trillion into its other accounts between April 2013 and March 2014, according to the EITI report.

The NRGI was unable to learn the nature of these accounts. The government also failed to provide the EITI report’s authors with details of how the accounts functioned, they said.

The NRGI said the Ministry of Finance had indicated that the amounts SOEs transfer to these other accounts had to be verified and approved by the Union Auditor General’s Office, but that there were limits to the oversight.

“I don’t doubt that fundamentally there are some kinds of limits or controls,” said Mr Heller. “But it would be very beneficial if the government were to come out with a clear public statement explaining what those limits are.”

Leaving aside a drastic overhaul of how these finances are managed, even more transparency would be a huge step forward, the report said, as the public has little idea just how much revenue the SOEs retain, or the rules governing how they use the cash.

In some countries, SOEs engaged in highly sophisticated enterprises or investments need large amounts of revenue. But Myanmar SOEs – in their role as minority partners with private companies – do not, said the NRGI.

It seems unlikely that MOGE would require more money in its other accounts than the government spent on health – as was the case in the 2013-14 fiscal year, according to the NRGI. But in order for the public to make an educated decision on such an issue, it said, there needs to be more information available.

In a 2013 NRGI survey of 44 SOEs in different countries, MOGE ranked 43nd for transparency. There was no systematic disclosure of reserves, production costs, budgets or revenues streams collected, the NRGI said. Information was similarly lacking elsewhere in the SOE sector, the report found.

A key step in the right direction, said Mr Heller, would be for the government to take a serious look at the amount of money SOEs are being allowed to control, and whether it matches up with their commercial activities.