Democratic Republic of São Tomé and Príncipe: Selected Issues

Selected Issues


Selected Issues

The Financial Performance of State Owned Enterprises and Risk Spillovers1

A. Background

1. The state-owned enterprises (SOEs) in São Tomé and Príncipe have long been a source of concern. Lacking autonomy in key managerial decisions and featuring inefficient production processes, the SOEs were for many years loss-making and therefore a drag on the government accounts. The negative financial results of the SOEs have been caused by low administrated sales prices and elevated operating costs. Specifically, SOEs operate with prices that were set by the government below cost recovery levels without adequate financial compensation, outdated production facilities (particularly for electricity and water), large technical and commercial losses, and other inefficiencies, including elevated personnel costs. They have been caught in a vicious circle where poor financial performance caused delays in much-needed investments, which in turn made the operations less efficient, and even worse financial results (World Bank, 2017). More recently, some SOEs achieved a partial turnaround.

2. There are four fully state-owned firms and another four enterprises with minority government stakes. The four SOEs operate in the provision of electricity and water (EMAE), port (ENAPORT), airport services (ENASA), and postal services (Correios). They are considered strategic to the national development. The government has minority stakes of 16 to 49 percent in the other four enterprises, operating in telecommunications, banking, air transportation, and oil import and distribution.

3. Among the large SOEs, the energy supplier EMAE faces the biggest challenges. EMAE has registered losses since 2011, with operating costs outpacing commercial revenues, despite some subsidies by the government. Its outdated energy production equipment makes energy generation costs exceed the average of Sub-Saharan Africa by far. EMAE’s tariff structure has not been revised in years, and the average retail tariff of USD 0.21/KWh does not cover its average cost of service of USD 0.32/KWh, owing to EMAE’s heavy reliance on inefficient thermal turbines and costly fuel imports. In addition, energy transmission and distribution losses amount to 43 percent of the energy dispatched, which is well above the SSA average of 15 percent (World Bank, 2017). As a result of the persistent losses, EMAE has accumulated large domestic arrears to its suppliers. The other two large SOEs, ENAPORT and ENASA, also suffer from outdated equipment and a rigid pricing structure, but have managed a partial turnaround in recent years by containing costs and acquiring some efficiency-enhancing equipment.

4. To address the poor operating performance, several medium-term investment projects are being implemented. The World Bank Power Sector Recovery Project supports a long-term structural improvement of the infrastructure and the management and planning capacity at EMAE (World Bank, 2017), with other development partners also contributing to the reform agenda. Central to the reform are the development and implementation of a Least Cost Development Plan and a Financial Management Improvement Plan. Specific measures include reducing production costs by rehabilitating hydroelectric plant and reducing losses through large-scale installation of meters. EMAE also expects significant cost savings by purchasing lower-cost electricity from private operators that reportedly plan large investments in solar power and natural gas plants.

5. With medium-term structural reforms underway, this paper focuses on SOE’s financial performance, issues surrounding widespread arrears, and spillover risks to other sectors. The financial performance of the SOEs is assessed using typical performance indicators covering profitability, solvency, liquidity and leverage. The paper then presents the consolidated structure of arrears that have built up between the SOEs and other government entities as well as the private sector. Spillover risks from SOE underperformance and arrears to the fiscal and financial sectors are evaluated as well.

B. Financial Performance of SOEs

6. The four SOEs have weaker financial performance than those partially state-owned and are saddled with high debt and arrears (Table 1). As a result of high costs and inadequate pricing of services noted previously, the SOEs not only register depressed profits (ENAPORT, ENASA) or losses (EMAE, Correios) but also low capital and mounting debt, which is composed mainly of arrears to suppliers and the Treasury.

Table 1.

São Tomé and Príncipe: SOE Financial Statement Information (end-2017 or earlier, in EUR million)

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* end-2015; ** end-2016; # end-2017 preliminary figures.Source: SOEs’ financial statements; World Bank.

7. Performance varies across the four SOEs. ENAPORT has a relatively healthy financial situation overall. ENASA has managed a turnaround, posting small profits since 2016, but remains financially vulnerable. Compared with these two overall viable firms, EMAE’s financial statements point to an array of operational and financial deficiencies of a firm at pre-insolvency. The postal service provider Correios is also loss-making, but its operations are very small. In the following, the performance of the large three SOEs2 is assessed in detail using typical corporate performance indicators relating to profitability, capitalization, working capital/arrears, cash flow, and leverage. Table 2 provides the main financial performance indicators of the three large SOEs.

Table 2.

São Tomé and Príncipe: Key SOE Performance Indicators (end-2017 or earlier)

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* end-2016; ** end-2017 preliminary figuresSource: SOEs’ financial statements.

8. Profitability of the SOEs is depressed due to an adverse cost-revenue relationship. As

noted previously, the three large SOEs are either loss-making or barely breaking even because of the elevated cost of production and personnel and inadequate tariff structures that in some cases have not been adjusted for a decade. The operational cost-to-revenue ratios of the three large SOE range from 94 to 177 percent (88 to 160 percent, if excluding depreciation and amortization). Correspondingly, the profit margin (net income divided by revenue) is near zero or negative, with ratios ranging from 2.2 to -61 percent. The profit situation is generally more favorable at the other partially state-owned enterprises that are facing competition, which forces them to improve the cost-revenue ratio.

9. Capitalization is thin following years of negative profits, notwithstanding some recent gains. Previous years of negative profits have eroded SOEs’ equity capital. While the three large SOEs still show an overall positive capital position, EMAE’s and ENASA’s capital would be strongly negative without the accounting recognition at the cost of installation of “investment subsidies” for equipment received from the state and development partners free of charge. For example, EMAE’s capital position was officially STD 415 million at end-2016, but it would have been STD -934 million without capitalizing that subsidy. By contrast, ENAPORT has a negligible investment subsidy in its capital account.

10. Working capital is low or negative, and additional arrears have accumulated at EMAE. Working capital—the difference between short-term claims and short-term liabilities—is strongly negative and deteriorating at EMAE, while still negative but slightly improving at ENASA. EMAE’s working capital deficit of STD 1.1 billion exceeded its nominal capital of 0.4 billion at end-2016, with the gap having widened since. ENAPORT’s working capital turned positive in 2016 on the back of some arrears clearance.

11. As a result, the cash flow situation is tense, leading to very low cash-at-hand and potential payment difficulties. Cash flows at the three large SOEs were negative in 2017, depressing short-term assets (cash and cash-like positions such as bank deposits), which has implications for the ability to honor debt obligations (mostly short-term debt owed to suppliers). The ratio of cash-to-short-term liabilities is consequently rather low, ranging from 0.1 percent (EMAE) to 9.9 percent (ENASA). Some SOEs have secured bank overdraft facilities to safeguard payment capacity.

12. The SOEs carry high debt and are overleveraged. The typical debt viability indicator, the debt-to-EBITDA3 ratio is either at the critical threshold of five (ENAPORT: 4.9) or far beyond it (ENASA: 15.2). EMAE’s ratio is negative (and therefore undefined) due to its losses. Even at modest earnings the debt would be excessive; for EMAE’s debt of STD 1.7 billion to become sustainable, earnings (EBITDA) would have to increase by STD 440 million, which exceeds EMAE’s annual gross revenue and is out of reach given the various limitations the company faces. Similarly, ENASA would have to triple its current EBITDA to attain debt sustainability.

13. Notwithstanding the debt load, SOEs intend to raise debt for investment purposes. Some SOEs plan on taking out relatively large bank loans for carrying out efficiency-enhancing investment projects. ENAPORT and ENASA stated their intention to obtain from local banks EUR 2 million and EUR 1.5 million, respectively, at commercial rates to replace or update the plant and equipment. The SOEs contend that the efficiency gains will be large enough for the additional debt service to be manageable.

14. The other state enterprises with minority government stakes show a decent financial performance, in part thanks to a dominant market position. Both the partially state-owned bank, BISTP, and the telecom operator, CST, are profitable and show only moderate leverage. The good financials are helped by a dominant position, with market shares of about 50 and 85 percent, respectively. The national airline, STP Airways, showed a profit in 2015, yet remains financially weak, not least because of the government’s lack of participation in a recent capital increase. The oil supplier, ENCO, appears to be profitable in accounting terms, but has been burdened by large arrears by the public sector.

C. Structure of Arrears and Risk Spillovers

15. An intricate web of arrears has emerged as a result of chronic losses and liquidity problems at large SOEs. Figure 1 displays the net arrears between institutions (in part after netting out bilateral arrears), with the direction of the arrows indicating arrears to the recipient entity and their width roughly proportional to the magnitude of arrears. The principal arrears encompass the large SOEs, central government and other government entities, but there are also arrears to or owed by partially state-owned enterprises and private firms. In addition, the oil supplier, ENCO, has built large arrears to its parent company, an Angolan SOE, on the back of arrears by several public institutions. In addition, there are other arrears to and from foreign firms and NPLs of private firms with banks. A center node in the web of arrears is central government that has, alternatingly, arrears and claims with SOEs, the other state enterprises, ENCO, and the private sector (its claims reflecting back taxes).

Figure 1.
Figure 1.

São Tomé and Príncipe: Structure of Arrears (Net Perspective)

Citation: IMF Staff Country Reports 2018, 322; 10.5089/9781484385005.002.A003

Sources: São Tomean authorities; and IMF staff calculations.

16. SOEs’ sizable outstanding claims aggravate the repayment of their own arrears. Two of the large SOEs (EMAE and ENAPORT) have been unable to collect bills from many of their clients, some of which may be financially distressed themselves, and others are late in their payments as collection and enforcement mechanisms are weak. In turn, the missing cash inflows have made it difficult for SOEs to honor their payment obligations, including further clearance of existing arrears.

17. Government and SOEs have recently agreed on new arrears clearance plans after similar plans effectively had stalled in the past. ENAPORT and ENASA have agreed repayment plans for a period of 5 and 25 years, respectively, to fully clear arrears (including penalty interest4) to the government and some of its entities. Similar plans had been agreed in the past (involving payments from both SOEs to government and vice versa; IMF, 2016) but they effectively fell flat in the process. While the existing arrears were being cleared as planned, new arrears arose, and in some cases this led to an even larger stock of arrears. A notable exception is the repayment of arrears from the government to ENCO, which is acutally running ahead of schedule because the positive differentials between domestic prices and import prices in the past two years were used to reduce the debt accumulated by previous oil price subsidies.

18. Compliance with the arrears clearance plans may prove to be challenging. While SOEs appear fully committed to the new repayment plans, their low liquidity and prospect of additional debt service on proposed new bank loans may make adhering to the annual payment schedule difficult. For example, the agreed annual repayment by ENASA would, other things equal, deplete its cash-at-hand within three years, and matters would be worse, if additional commercial bank loans needed to be serviced and the efficiency gains of the investment projects failed to materialize in time.

19. The large arrears of SOEs constitute significant contingent fiscal liabilities. The SOE liabilities are essentially guaranteed by the government, either implicitly given the strategic importance of the SOE or explicitly by formal agreements. Such large contingent liabilities, which are concentrated with a few creditors (e.g. ENCO), risk undermining the financial viability of the government and hence raise debt risk premia in the future. STP appears to have avoided this situation so far, as treasury bill issuance have generally been oversubscribed. Nevertheless, private suppliers have stopped providing goods and services to the state on credit, thus hindering government operations.

20. Recurring SOE losses are causing additional contingent liabilities. In principle, government needs to cover those ongoing losses by injecting fresh capital so that a prudent debt-to-equity ratio is preserved. In practice, however, such capital injections have been rare (e.g. EMAE’s paid-in capital has not been increased for several years), and contributions take the form of the aforementioned investment subsidy, whose accounting value appears questionable. Even at profitable SOEs and other enterprises with state participation, the government needs to inject capital for those firms to attain their investment and growth objectives.5

21. In addition, delays in the clearance of tax arrears have contributed to the strain in government finances, although some SOEs are also owed by government. The tax arrears, equivalent to almost 7 percent of GDP, have deprived the state of much needed revenue for social programs, such as education and health, as well as investment in infrastructure, and have led, in turn, to arrears by the government to suppliers. The tax arrears, some of which have accumulated over several years, also damage the credibility of the tax system and undermine tax compliance.

22. Adverse macrofinancial linkages emanating from SOEs are a general concern, but they are subdued at present. Banks have relatively small loan exposures to two SOEs, which are performing. SOEs appear to prioritize on-time servicing of the occasional bank debt that they take out. Indirect linkages between SOEs and banks via private sector firms are also contained. Banks are exposed to a few commercial clients to whom the central government is in arrears, but none of these loans are currently past due. Even so, anecdotal evidence gathered from banks and the BCSTP suggests that there have been cases of non-payment by government, leading to liquidity issues at suppliers who then defaulted on their bank loans.

D. Conclusion and Recommendations

23. The SOEs’ poor operational and financial performance has contributed to an intricate structure of domestic arrears, and arrears clearance remains challenging. Analysis of financial performance indicators has shown that the large SOEs suffer from low profitability and liquidity as well as excess leverage, which threaten solvency in individual cases. The SOEs have had, and in the case of EMAE continue to have, difficulties clearing their large stock of arrears. The recently-agreed repayment plans for some of them may prove to be challenging in view of weak cash flow and the prospect of servicing additional bank loans to be taken out for investment purposes. Macrofinancial linkages appear to be muted at present, but could become an issue as SOEs increase their bank debt and debt service without immediate efficiency gains.

24. To improve the subpar financial performance of SOEs, a combination of medium- and short-term measures is needed. The only solution to the SOE issue is to push forward with the aforementioned medium-term reform plans and implement effective structural measures. Pending such deeper reforms, the following short-term measures aimed at addressing the arrears situation are recommended:

  • With medium-term investment projects in train, SOEs should attempt to identify areas for cost saving (e.g. staff cost, including training expenses) and collect more arrears from customers.

  • The potential for netting out bilateral arrears between SOEs and government should be explored, presupposing that the claims are considered valid by both parties.

  • To ease somewhat the burden of arrears clearance, the central government could consider forgiving late-payment penalties in line with full scheduled repayment of the main arrears per year.

  • Borrowing by SOEs from banks should be in line with debt servicing capacity from SOEs’ cash flows to avoid NPLs with banks or accumulation of additional arrears elsewhere.


  • International Monetary Fund (2016): “Democratic Republic of São Tomé and Príncipe: Staff Report for the 2016 Article IV Consultation, First Review under the Extended Credit Facility, and Request for Waiver for Nonobservance of Performance Criterion and Modification of Performance Criteria—Press Release; Staff Report; and Statement by the Executive Director for the Democratic Republic of São Tomé and Príncipe”, IMF Country Report No. 16/174.

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  • World Bank (2017): “São Tomé and Príncipe Public Expenditure Review”, Washington D.C.


Prepared by Torsten Wezel.


The fourth SOE, the postal service (Correios) is not evaluated due to its small size.


EBITDA stands for earnings before interest, taxes, depreciation and amortization and is commonly used to compare companies’ cash flow situations, particularly in company valuation. The debt-to-EBITDA ratio is a prime indicator of corporate debt sustainability with a critical threshold of debt commonly considered to be five times EBITDA (higher multiples indicating unsustainable debt).


These late-payment penalties are scheduled to be forgiven only after full clearance of the underlying arrears at the completion of the repayment plan. The amounts of accumulated penalty interest are large at about 40 percent (ENAPORT) and close to 100 percent (ENASA) of the underlying arrears.


For example, the government has injected fresh capital in the bank it partially owns, BISTP, but has not participated in the capital increase of STP Airways.

Democratic Republic of São Tomé and Príncipe: Selected Issues
Author: International Monetary Fund. African Dept.