Abstract
1. The State-Owned Enterprise (SOE) sector in Tajikistan is large and systemically important.2 The sector employs around 24 percent of the labor force and accounts for approximately 17 percent of GDP. Assets of this sector are estimated around 48 percent of GDP (EU, 2017). SOEs operate in many sectors of the economy, from energy and infrastructure to communal services, communications, banking, transport, trade, and insurance.3 The three largest SOEs as measured by assets — the energy company Barki Tojik (BT), Tajik Railways, and the Tajik Aluminum Company (TALCO) — hold over 80 percent of all SOE assets (EU, 2017). Other large SOEs include Tajiktransgaz and Tajik Air.
Fiscal Risks from State-Owned Enterprises and Reforms in Tajikistan1
A. Introduction
1. The State-Owned Enterprise (SOE) sector in Tajikistan is large and systemically important.2 The sector employs around 24 percent of the labor force and accounts for approximately 17 percent of GDP. Assets of this sector are estimated around 48 percent of GDP (EU, 2017). SOEs operate in many sectors of the economy, from energy and infrastructure to communal services, communications, banking, transport, trade, and insurance.3 The three largest SOEs as measured by assets — the energy company Barki Tojik (BT), Tajik Railways, and the Tajik Aluminum Company (TALCO) — hold over 80 percent of all SOE assets (EU, 2017). Other large SOEs include Tajiktransgaz and Tajik Air.
2. Tajikistan launched a privatization program in 1991. Around 12,000 small- and medium-scale state enterprises were privatized or liquidated. However, the largest SOEs, especially those implementing important social functions or suffering substantial losses, continued under state ownership. As of 2017, 931 SOEs were active with the remainder listed in the Tax Committee’s register as under re-registration or liquidation.
B. Losses and Fiscal Risks from the largest SOEs
3. The SOE sector is inefficient and loss-making, and BT accounts for almost all of its losses. While information on the largest SOEs has been collected regularly by the SOE Monitoring Department of the Ministry of Finance, the consistency and reliability of the data may be questionable. The largest SOEs are inefficient and loss-making. Cumulative losses amounted to 3.7 percent of GDP in 2018.4 Despite an improving financial situation, BT accounts for almost all of the losses of this sector owing to below cost recovery tariffs as well as the revaluation of its FX denominated borrowing from the government and commercial banks. The large state-owned aluminum company, TALCO, is also loss-making. Most of the other SOEs show only modest profitability.5
Tajikistan: Summary of Financial Position and Performance of 13 Large Non-Financial SOEs
(Percent of GDP)
Tajikistan: Summary of Financial Position and Performance of 13 Large Non-Financial SOEs
(Percent of GDP)
| 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | |
|---|---|---|---|---|---|---|---|
| Current assets | 13.86 | 13.37 | 10.09 | 9.11 | 9.87 | 9.31 | 11.35 |
| Total assets | 42.76 | 40.96 | 44.81 | 45.50 | 43.45 | 40.40 | 41.93 |
| Current liabilities | 14.22 | 17.27 | 16.98 | 18.24 | 22.62 | 23.61 | 27.24 |
| Total liabilities | 25.60 | 27.84 | 28.08 | 35.31 | 38.52 | 42.25 | 47.89 |
| Shareholder’s equity | 17.16 | 13.12 | 16.73 | 10.19 | 4.93 | n.a. | n.a. |
| Revenues | 11.78 | 9.79 | 8.18 | 9.44 | 8.25 | 7.70 | 8.04 |
| Net profit | -0.90 | -1.78 | -1.36 | -5.20 | -3.93 | -5.42 | -3.71 |
Tajikistan: Summary of Financial Position and Performance of 13 Large Non-Financial SOEs
(Percent of GDP)
| 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | |
|---|---|---|---|---|---|---|---|
| Current assets | 13.86 | 13.37 | 10.09 | 9.11 | 9.87 | 9.31 | 11.35 |
| Total assets | 42.76 | 40.96 | 44.81 | 45.50 | 43.45 | 40.40 | 41.93 |
| Current liabilities | 14.22 | 17.27 | 16.98 | 18.24 | 22.62 | 23.61 | 27.24 |
| Total liabilities | 25.60 | 27.84 | 28.08 | 35.31 | 38.52 | 42.25 | 47.89 |
| Shareholder’s equity | 17.16 | 13.12 | 16.73 | 10.19 | 4.93 | n.a. | n.a. |
| Revenues | 11.78 | 9.79 | 8.18 | 9.44 | 8.25 | 7.70 | 8.04 |
| Net profit | -0.90 | -1.78 | -1.36 | -5.20 | -3.93 | -5.42 | -3.71 |
Tajikistan: Losses by Barki Tojik and other SOEs
(Millions of TJS)
Citation: IMF Staff Country Reports 2021, 201; 10.5089/9781513595986.002.A001
4. BT has significant arrears to the government on FX denominated loans. The government on-lends concessional FX loans and grants from multilateral and bilateral agencies to BT on non-concessional terms. These loans are denominated in FX and are intended to develop the energy infrastructure. However, these debts are not serviced fully, resulting in BT arrears to the government. At end-2018, the outstanding amount of government loans to BT was 17 percent of GDP. The government has continued to service the external debt.
5. BT is also in arrears to domestic banks and energy suppliers, posing significant financial sector and fiscal risks. BT has commercial FX denominated loans from domestic banks and power purchase agreements with domestic energy suppliers. Owing to its financial situation, it has accumulated arrears on both. The cumulative liabilities of BT to banks and suppliers were 6V2 percent of GDP at end-2018. The exposure to BT has the potential to weaken bank balance sheets in Tajikistan, with associated fiscal risks.
6. Non-guaranteed borrowing by other SOEs also poses sizable fiscal risks. Tajiktransgaz has signed a loan agreement for $300 million (3½ percent of 2019 GDP) to finance the construction of a gas pipeline (Line D of the Central Asia-China Gas Pipeline). TALCO is loss-making and in significant arrears to BT. Recently TALCO has signed an MOU aiming to borrow $545 million (6V2 percent of 2019 GDP) from Chinese companies to finance the modernization of its plant. The agreement is expected to be finalized in 2020. Given the financial situation of the SOEs, these loans may become contingent liabilities for the government.
C. SOE Reform Efforts in Tajikistan
7. The BT financial recovery program is an ongoing multi-year multi-faceted reform effort to improve its operational efficiency and financial situation. There is recognition in government that BT’s situation is unsustainable. The authorities have implemented annual electricity tariff increases of about 17 percent since 2016 to improve its financial situation and reduce subsidies to residential consumers. They have also issued a decree to unbundle its operations into generation, transmission and distribution. An Electricity Regulatory Department has been established under the Antimonopoly Agency. There is progress in improving the collection rates. A new tariff methodology has also been approved that would allow the setting of tariffs in line with full cost recovery. Further annual tariff increases are planned (17 percent till 2022, 8 percent between 2023- 2025) that will move BT closer to full cost recovery and eliminate cross-subsidization of consumers. Despite these improvements, arrears to commercial banks and energy suppliers have continued to rise. The planned reform of BT with WB and ADB assistance envisages clearance of arrears to suppliers and commercial banks and restructuring of the debt to government, although details remain to be fleshed out. Improvements to inventory management and collections as well as rising export revenues are expected to strengthen BT’s financial position over the medium-term.
Tajikistan: Barki Tojik Proceeds from Energy Sales
(Millions of TJS)
Citation: IMF Staff Country Reports 2021, 201; 10.5089/9781513595986.002.A001
Source: Audited financial statements.8. An SOE monitoring department was established at the Ministry of Finance in 2010, and reform efforts have continued since the conclusion of the last Fund Program in 2012. The reforms have been supported by IMF Technical Assistance and donor efforts and are aimed to improve SOEs oversight, transparency, and performance. These reforms include:
Gradual expansion in the monitoring powers of the SOE monitoring department from 10 to the 24 largest SOEs. The department is constantly building its capacity and participating in relevant training. Recently, this list of the 24 most economically significant SOEs has been updated and is awaiting approval.6
Inclusion of the Statement of Fiscal Risks (SFR) in the state budget document. The monitoring unit has promoted transparency in the sector. The 2016 and 2017 statements defined the main channels of fiscal risks, summarized the financial position and financial performance of largest SOEs, explored fiscal relations between SOEs and central government, described quasi-fiscal activities, subsidies, explicit and implicit contingent liabilities of the central government as well as those of the SOEs (IMF 2017). Preparation of the 2018 and subsequent SFRs is facing delays.
Approval of a Strategy to Manage Fiscal Risks stemming from SOEs (September 2016). Steps have been taken to operationalize this strategy, including the adoption of an Action Plan (July 2017) to improve the governance and transparency of SOEs. However, implementation has been slow.
Preparation of a new SOE law. Key improvements in the new SOE law are aimed at promoting SOE profitability and financial sustainability and thereby reducing SOE fiscal risks, increasing transparency and accountability by following international standards of governance (including explicit financial performance requirements and availability of information), and improving definitions to make them consistent with the Government Finance Statistics Manual 2014 and other laws. The draft has passed the internal coordination process within the government and is awaiting final approval.
Approval of a government decree (May 2019) to establish a Fiscal Risks Coordination Council on the management of SOE fiscal risks. Key responsibilities assigned to the council include approval and implementation of the action plan to operationalize the SOE Fiscal Risk Management Strategy.
D. What More is Needed?
9. It will be important to continue the reform of BT. The program designed with WB and ADB assistance should be implemented. In addition to planned annual increases in energy tariffs, there is a need for government to restructure BT’s existing loans and arrears to make them concessional in line with the initial donor terms. Repayment of commercial banks and suppliers will reduce BT’s debt burden. This will need to be accompanied by improvements in collection and future increases in tariffs to ensure full cost-recovery over the medium-term. Targeted social safety nets will be needed to mitigate the impact of these tariff increases on vulnerable segments of the population. In addition, over the longer-term, drawing on the Georgia experience (Annex), it will be important to ensure continued efforts to deregulate the sector and improve its transparency and management.
10. The SOEMD faces challenges to manage the fiscal risks from SOEs. These include:
Accounting, auditing, transparency and disclosure. Full implementation of International Financial Reporting Standards (IFRS) by all large SOEs is yet to be put in place. Financial difficulties prevent many SOEs from conducting regular audits. It is not uncommon for even the largest SOEs to receive an adverse audit opinion. This underscores potentially severe issues related to internal controls of the quality of the financial statements. It also represents a risk for the state as the ultimate owner.
Data constraints. The data provided by SOEs on their financial performance is limited. There are significant inconsistencies between audited reports and those submitted to the MOF by some large SOEs. There is no unit within the government that has full and comprehensive information of the size of SOE sector or its financial situation.
Staffing and capacity issues. The current staffing of the SOEMD is limited to 8 people, who share the functions of on-site inspections, participation in courts, oversight, monitoring, and fiscal risk evaluation. Bank bailouts have broadened the tasks of SOEMD, which requires staff capacity building or outsourcing support for comprehensive monitoring and risk assessment.
11. Stepped up implementation of reforms will help improve transparency and financial discipline in SOEs. The new SOE law to improve financial oversight, governance and accountability of SOEs should be approved in line with IMF TA recommendations. The revised list of SOEs should be approved to include all economically significant SOEs. The preparation and inclusion of the SFR in the budget documents should continue. Capacity and staffing of the SOEMD should also be improved. Regular audit reports would be needed to conduct proper analysis and decision making. Without regular comprehensive audits it is hard to reconcile the contradictions in government behavior as owner, regulator, and provider of social services. The authorities should prepare and publish accrual-based consolidated financial statements for general government.
12. Borrowing by SOEs should be carefully considered and included within the government’s overall medium-term debt envelope and strategy. As a first step, comprehensive recording and reporting of all public debt (including non-guaranteed SOE debt) is needed to better understand and contain debt vulnerabilities. Large infrastructure investments and investments that are aimed at public policy goals (e.g. maintaining domestic employment, health etc.) should be undertaken by the government as part of its fiscal policy and financed through government borrowing. Commercial borrowing by SOEs should be underpinned by strong corporate governance and proven commercial viability.
13. More ambitious SOE reforms will be needed to create a dynamic economy. Many developing countries have introduced reforms to improve the SOEs’ performance by establishing better institutional frameworks for managing them, allowing SOE management more autonomy in their business operations, and strengthening ex-post monitoring and incentive mechanisms (Annex). The large and unprofitable SOE sector in Tajikistan likely holds back economic growth and there is a need for ambitious reforms to improve its operational and managerial efficiency.
Annex I. International Experience with Reforms of State-Owned Enterprises
SOE reforms have long been the focus of developed and developing countries alike. Many developing countries have Introduced reforms to Improve the SOEs’performance by establishing better Institutional frameworks responsible for managing them, allowing SOE management more autonomy In their business operations, and strengthening ex post monitoring and Incentive mechanisms. Some of the key SOE reforms Included separation of administrative and business operations where the latter were entrusted to a board of directors who were responsible for reporting SOE performance to the shareholders. A large number of SOEs have since been publicly listed and their governing structures now Include both private and foreign firms as minority or majority shareholders such that the government Is no longer Involved In most SOEs’ day-today operations (ADB 2017). The results from these reforms, however, have been somewhat mixed. In many countries, the lack of political commitment to SOE reforms along with the prevalent overarching role of the government In SOE management and unspecified performance mandates still pose significant challenges for Improving SOE performance.
Georgia
In 1991, the Georgian economy went into a deep recession accompanied by an economic crisis, political unrest, and internal conflict. The power sector suffered the most where countrywide blackouts became a common occurrence in Georgia.
Key reforms. After stabilization in 1995, Georgia began to reform the power sector in two phases (ADB, 2015). Phase 1 reforms included creation of a regulatory body and diversification for independent generation, transmission and distribution entities; privatization of the power sector; tariff reform across different customer types; and establishment of a wholesale electricity market. Phase 2 included further deregulation and privatization; rehabilitation of state-owned generation, distribution, and transmission assets; and the replacement of Georgian Wholesale Electricity Market by the Electricity System Commercial Operator which is responsible for balancing electricity trade as well as guaranteed capacity (WB, 2004). Recently, the authorities have embarked on further energy market reform based on EU principles.
Results. The improvements in the system brought by the reforms and added investments have ensure full electricity access in the country. Georgia has made significant progress in enhancing transparency, economic efficiency, regulation, and sector management. Lessons learned from the Georgia experience demonstrate the importance of fair regulations for transparent competition; guaranteeing the full independence of the regulator; and ensuring no political interference in regulatory enforcement (ADB 2015).
Malaysia
Malaysia enacted SOE reforms in the aftermath of the Asian crisis (ADB, 2017). In 2004, the government embarked on a transformation program for Government Linked Companies (GLCs). The program had realistic and performance-based objectives in line with international benchmarks.
Key reforms. The program introduced key performance indicators (KPIs), as well as performance-based contracts and compensation, along with a change in the composition of GLC boards and senior management. It addressed the root causes of underperformance in SOEs, upgraded their legal and operational framework, and infused newer management. Management were given a clear mandate and time frame to improve performance.
Results. These reforms helped instill a performance-based culture, and improved SOE management through better utilization of capital and other resources, which translated into higher revenues, profitability, and shareholder returns. The GLCs also expanded globally during this time.
Kazakhstan
The 2008 financial crisis revealed many problems in SOE sector where those companies were severely hit by the scarcity of capital.
Key reforms. The government created a system of state asset management and established two domestic sovereign wealth funds: National Fund of Kazakhstan and Sovereign Wealth Fund Samruk-Kazyna. This defined the relationship between the government and SOEs as a form of cooperation, where the government delegated some of its functions to the market and largely acted through stimulation and regulation. SOE management was expected to switch to a customer-oriented model grounded in market categories such as profitability, competition, transparency, business initiatives, and equal access to capital (Nurgozhayeva 2017). The new method of state management implied active involvement of private companies into the activities traditionally carried out by the state sector.
In January 2017, price regulation was abolished, except “natural monopolies” as railway transport, electric power, gas supply and airport services. New tools of antitrust response were introduced. The government updated the 2007 Model Code of Corporate Governance in November 2016 to take into account OECD and G20 standards of corporate governance. Samruk-Kazyna recently issued a Corporate Governance Code to be applied in all companies of the group where state ownership exceeds 50 percent. Each of the national managing holdings as well as other state-owned firms also adopted corporate governance codes (OECD, 2018).
Results. OECD’s reports that financial reporting and auditing practices in the SOE sector have improved. External auditors in national managing holdings and national holdings are appointed by the boards of directors, the activities of which are also audited. Companies’ annual reports are comprehensive and often follow international standards. The State Property Committee receives performance reports from all companies on a quarterly basis. According to the World Bank (2018), the current situation in the sector remains the same as SOEs tend to be large and lack incentives to continue to improve the quality and efficiency of their services and products—while often keeping tariffs and prices below cost recovery levels.
References
Asian Development Bank Institute, 2015. “Assessment of power sector reforms in Georgia”, Country Report.
Asian Development Bank Institute, 2017. “Efficient Management of State-Owned Enterprises: Challenges and Opportunities”, Policy brief, (Tokyo, Asian Development Bank)
European Union, 2017. “Safeguard against Fiscal and State-owned Enterprise Risks” Project, Final report, EuropeAid/133863/C/SER/TJ.
OECD, 2018. Reforming Kazakhstan: Progress, Challenges and Opportunities.
R. Nurgozhayeva, 2017. “State Ownership in Terms of Transition: Curse or Blessing”, Cornell International Law Journal.
World Bank Group, 2004. “Revisiting reform in energy sector, lessons from Georgia”, World Bank Working Paper #21, (Washington, World Bank Group).
World Bank Group, 2018, “A new growth model for building a secure middle class”, Kazakhstan Systematic Country Diagnostic.
Prepared by Nailya Menlasheva and Yuri Sobolev.
State-owned enterprises (SOEs) are those in which the state exerts significant control through full, majority, or significant ownership owned by the central or local governments (Sturesson, Mclntyre, and Jones 2015).
An EU study conducted in 2015 “Safeguarding against Fiscal and State-owned enterprise risk” identified 1016 SOEs. The majority are under central government ownership, while about 20 percent are under municipal ownership.
These results are based on data from the SOE Monitoring Department of the Ministry of Finance. Data coverage extends to the 24 largest SOEs.
See also, “An assessment of state-owned enterprises in Tajikistan” Selected Issues Paper, IMF 2017.
Roghun is included in the updated list of SOEs to be monitored by the SOEMD.
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Prepared by Farid Talishli.
The ETR is defined as a ratio of paid taxes to reported profit. A high ETR may also reflect underreported profit.
The 5 percent VAT rate reflects reduced VAT granted to a few sectors (see further discussion). Tax payers with turnover below the threshold of TJS 1 mln (approximately USD 100,000) are subject to a simplified tax regime. Tajikistan’s VAT refund system is weak, potentially adding costs to producers.
Profit-based incentives reduce tax rates on taxable income or waive tax altogether to increase profitability. Cost-based incentives decrease the cost of capital and can help boost investment (e.g., investment allowances, tax credits, and accelerated depreciation).
In 2018 trade related tax revenues consisted 30 percent of total tax revenues.
Reforms included simplification of tax system, the removal of exemptions, differential taxation on nonresidents to limit profit-shifting by multinational companies.
Empirical evidence finds that taxes matter for investment in advanced and developed countries (De Mooij and Ederveen, 2008).
