Describing the Opaque and Complex SOE Sector in South Asia Using Data

sout H A si A’ s st A te - owned enter P rises 103

from SOEs. Not only does it cause SOEs to underperform by reducing market pressures on SOE managers (Jensen 1986; Maskin and Xu 2001), but it also enables debt to build up in loss-making SOEs. The constrained environment of SOEs could also temper the effectiveness of internal SOE reforms. For example, Berkowitz, Ma, and Nishioka (2017) argue that the apparent efficiency gains from SOE corporatization in China were in fact due to a contemporaneous tightening of their operating environment. Bartel and Harrison (2005) show that the effectiveness of partial SOE privatization in Malaysia depended on external factors such as access to soft loans.

Policy lessons and implications. The most immediate policy lesson of our analysis is that the contingent liabilities from SOEs are nontransparent, and policy makers in South Asia are not paying enough attention to them. Given the limitations of publicly available data, it is difficult to quantify even SOEs’ total liabilities or debt, much less their explicit and implicit government commitments.

Governments must better assess and monitor the fiscal risks from SOEs, incorporate them into their fiscal planning and debt management, and make funding provisions so that SOE distress and rescue, when justified, does not entail serious disruptions to critical public spending.

The deeper policy question is how to mitigate unnecessary contingent liabilities stemming from SOE operations. The evidence

presented in this chapter leads us to recommend a combination of internal reforms at the SOE level and external reforms in the operating and broader controlling environ-

ment. These reforms are discussed in the final part of the chapter.

Analyses Must Cope with a Lack of Data about South Asian SOEs

This chapter relies mainly on publicly available official reports and statistical tables to present stylized facts about the SOE sector in various South Asian countries, such as its size, performance, and liabilities. • India. The main official data source for

Indian CPSEs are annual reports on CPSEs published by the Department of Public

Enterprises. Data on SOEs owned by the state governments of India (state public sector enterprises, SPSEs) are less easily available. Our main data sources were state-level SOE audit reports published by the Comptroller and Auditor General of

India (CAGI). • Pakistan. Data on Pakistani SOEs are from the annual Federal Footprint: SOEs

Annual Report, published by the Ministry of Finance. • Sri Lanka. Sri Lankan data are from the annual SOE Performance Report, published by the Department of Public

Enterprises, and from the Annual Report of the Ministry of Finance. These data were supplemented by a publicly available database compiled from various government reports by the independent think tank Advocata Institute. • Bangladesh. Bangladesh does not produce annual SOE reports. Our data for

Bangladesh are based on the statistical tables published in the annual Bangladesh

Economic Review, produced by the

Ministry of Finance. • Bhutan. Data on Bhutanese SOEs are from the State Enterprises Annual Report, published by the Ministry of Finance. Annex 3A lists these data sources and the country-specific definition/categorization of SOEs used in this report.

The data available in these official reports are generally at an aggregate level. India, Pakistan, and Sri Lanka have been publishing SOE-level revenue and balance sheet data in recent years. However, data for only a limited set of variables are available. For example, it is not always possible to measure value added and profits or to obtain SOElevel information on government support. India publishes firm-level data on CPSEs, but not SPSEs. This gap is worrying because much of the debt and accumulated losses reside in SPSEs.

104 H idden debt

Given the limited availability of official firm-level data, our firm-level analysis for South Asia relies on an Indian firm-level database called Prowess, which is maintained by the Center for Monitoring the Indian Economy (CMIE). Prowess contains detailed information on the balance sheet and performance of Indian firms, including a large share of India’s CPSEs. It is based on data reported by firms registered with the Registrar General of Companies. While Prowess is not fully representative of the formal manufacturing sector in India, it has good coverage of medium and large firms. On average over the years, Prowess has covered 80 percent to 90 percent of the Indian CPSE sector by number and more than 95 percent of it by total revenue. It is a panel data set, unlike the repeated crosssectional Annual Survey of Industries. This enables us to track CPSEs over time and look at their debt dynamics.

Prowess data consist of an unbalanced panel covering the period 1989–2018 with an uneven (growing) number of firms over time. To ensure that the sample used in the regression analysis stays constant across different regressions with different outcome variables, we excluded observations that are missing values for any of the key variables needed for our analysis. The average sample size of this data set is about 12,000 firms per year.11 We further cleaned the data set by replacing the values of outliers (those exceeding the 98th percentile) with the value for the 98th percentile. Table 3B.1, in annex 3B, presents summary statistics of key variables in Prowess for 2016. CPSEs constitute about 1 percent of the Prowess sample.

The SOE Sector in South Asia is Large and Complex

South Asia has a sizable nonfinancial stateowned enterprise sector. Sri Lanka has 400 nonfinancial SOEs, with the total revenue of the 42 largest “strategically important” nonfinancial SOEs equal to 8 percent of the GDP (figure 3.1).12 Pakistan has more than 200 such firms, and their revenue amounts to 12 percent of GDP. India has 331 SOEs that are under the federal government (CPSEs) and more than 1,000 SOEs under state governments (SPSEs). Together, they generate revenue equal to 19 percent of GDP. In Bhutan, most strikingly, SOE revenues equal 38 percent of GDP.13

Although economically significant, South Asia’s SOE sector is not a global outlier in terms of size. Many formerly socialist countries still have a larger SOE sector than most South Asian countries do. For example, despite a major privatization drive in the previous two decades, China still had more than 150,000 SOEs in 2019; their total value added comprised about 20 percent of national output (Harrison et al. 2019). SOEs also have a major presence in much of Central, Eastern, and Southern Europe, accounting for more than 15 percent of value added in Belarus, Poland, and Russia. This region has a total of 51,000 SOEs; Russia alone has more than 30,000 (Richmond et al. 2019).

South Asian SOEs are concentrated in energy, utilities, transport, and telecommunications. This concentration is most stark in the case of Pakistan, where the energy and transport sectors together account for 95 percent of SOE revenues (figure 3.2). For Sri Lanka, this share is 84 percent. While a precise breakdown of SOE revenue or investment by sector is not available for Bangladesh and Indian SPSEs, they too confirm to this pattern. In Bangladesh, the government has a monopoly on water and sewage services and dominates the energy sector through the Bangladesh Oil, Gas, and Mineral Corporation (PETROBANGLA), Bangladesh Power Development Board (PDB), and Bangladesh Petroleum Corporation (BPC) (World Bank 2019a). Two-thirds of the investment of Indian SPSEs is concentrated in electricity generation and distribution, with the rest spread unevenly in manufacturing, finance, and infrastructure.

SOEs are also present in manufacturing, services, and other sectors, such as the procurement and distribution of agricultural commodities. Indian CPSEs are particularly diverse; the manufacturing and services sector account for 62 percent and 20 percent of their