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$100m SOE subsidy cut goes in opposite direction


Tribune Business Editor

The Government has temporarily shelved plans to slash subsidies to state-owned enterprises (SOEs) as it seeks Parliamentary approval to borrow $251.4m for clearing unpaid bills prior to the 2021-2022 fiscal year-end.

Simon Wilson, the Ministry of Finance’s financial secretary, told Tribune Business that cutting annual subsidies to the likes of Bahamasair and the Water & Sewerage Corporation “remains a priority” even though this collective sum is set to increase by almost $31m year-over-year in the upcoming 2022-2023 Budget year.

The Davis administration’s Fiscal Strategy Report, released just four months prior in January 2022, had committed the Government to pursuing plans left in place by its predecessor that were targeting a $100m cut in these subsidies “over the medium-term horizon”.

However, with the Government yesterday unveiling its second “supplementary Budget” in just eight-and-a-half months since it took office on September 16, Mr Wilson said it had no choice but to address the “huge overhang” of unfunded liabilities generated by the likes of the Water & Sewerage Corporation.

Prime Minister Philip Davis QC, unveiling the 2022-2023 Budget in the House of Assembly, said that an additional $251.4m in borrowing will raise this year’s fiscal deficit to $758.6m - a sum equivalent to 6 percent of Bahamian gross domestic product (GDP).

When this is added to the $564m deficit forecast for the upcoming 2022-2023 fiscal year, and those incurred during the two years covered by Hurricane Dorian and the COVID-19 pandemic, The Bahamas will have added $3.47bn to its national debt in just four years. That latter sum represents almost 30 percent of the Government’s projected $11.609bn direct debt at June 30,2013.

Loss-making SOEs have been one factor driving this annual debt decrease, and the Davis administration is increasing total taxpayer subsidies to them in the upcoming 2022-2023 fiscal year by 7 percent to $457.183m compared to the $426.202m forecast for the current Budget cycle. Of the latter figure, some $398.251m had already been advanced as at end-March 2022.

Taxpayer funding is thus going in the opposite direction to the cost savings drive pledged in the Fiscal Strategy Report. Most of the increase is directed to three agencies: The Public Hospitals Authority ($9m to $232.456m); the Bahamas Public Parks and Beaches Authority ($8.8m to $24m); and the Water & Sewerage Corporation ($8m to $32m). 

Acknowledging that SOE taxpayer subsidies were going in the wrong direction, Mr Wilson said the Government had little option but to seek Parliament’s approval for additional monies and “put a serious dent” in the unfunded arrears owed to vendors by the likes of the Water & Sewerage Corporation.

“We have a huge overhang with Water & Sewerage,” the financial secretary told Tribune Business. “They owe a very significant amount to their vendors; Miya, Consolidated Water. We have to pay them. We just cannot ignore these very significant amounts.

“Reducing subsidies to SOEs is still a priority, but the reality is that coming out of the pandemic there were huge vendor arrears that we cannot keep ignoring.... This will put a serious dent in the arrears. It will clear a substantial portion and leave as clean a slate as possible. It will never be completely clear, but as clean a slate as possible.”

Mr Davis said the need for further supplementary borrowing approval, as required under the Public Financial Management Act, meant the 2021-2022 fiscal deficit - which measures by how much government spending exceeds its revenue income - will jump from $334.3m at end-March to a projected $758.6m at year-end. The latter, though, will still be $100m less than the revised 2021-2022 fiscal deficit unveiled at the first supplemental Budget.

“We still have a number of inherited arrears which we believe it is important to liquidate,” he added. “In this regard, we will be seeking parliamentary approval for a supplementary Budget for additional recurrent expenditure of $216.928m and capital expenditure of $34.49m 

“These balances are owed to hard-working women and men, who have given their time, energy and resources to contribute to the development of this nation, and months later still haven’t been paid. This harmful practice cannot be allowed to continue.... Just as our recently-established Credit Bureau encourages citizens to make timely payments, so too must we in government be timely in paying our bills.”

Apart from the $45m owed to the Water & Sewerage Corporation, this $251.4m also includes some $56.7m owed in insurance premium payments for public servants. Mr Wilson revealed that the latter liability “popped up four weeks ago” as the insurance agreement was “not completely in place” prior to that time.

The Government has also chosen the final remaining month of the 2021-2022 fiscal year as the time to raise $30m for completing the Andre Rodgers Baseball Stadium, while another $19m represents outstanding payments owed to Doctor’s Hospital for COVID-19 emergency support.

Breaking down how the borrowed sum will be employed further, Mr Davis said $6.4m will cover outstanding rent payments; another $6m will finance outstanding legal claims owed by the Government; and $4m will be dedicated to the restoration and refurbishment of public clinics.

The Prime Minister also foreshadowed reforms to the Public Finance Management Act that will result in all taxes and fees more than one year past due being transferred, when collected, into a “sinking fund” and used to pay future government arrears.

“Going forward, the new Public Finance Management Act will allow all tax arrears collected to be deposited directly into the sinking fund,” he added. These funds will be directly earmarked to the settlement of debt, because in many cases we have already borrowed to settle the arrears. This amendment would increase fiscal discipline, as future governments would not be able to rely on arrears to fund current expenditure.”

Hubert Edwards, the Organisation for Responsible Governance’s (ORG) economic development committee head, yesterday told Tribune Business that the need for a second supplemental Budget in just eight-and-half months raised questions about the strength of the Government’s “liability management system”.

“The supplemental budget ask of $252m for outstanding arrears, while done out of necessity, is indicative of the Government’s liability management process and carries important credit market information,” he said, hinting at the possibility of a negative reaction from credit rating agencies, multilateral lenders and lenders/creditors.

“As part of a broader discussion around debt management, targeting especially external lenders, a well-developed position on improved effectiveness in managing liability, going forward, will have positive implications and add credibility to the debt management process.”