20210601-世界银行-Hidden_Debt_Solutions_to_Avert_the_Next_Financial_Crisis_in_South_Asia_197页_19mb

Summary of Hidden Debt: Solutions to Avert the Next Financial Crisis in South Asia

Core Content

This report, authored by Martin Melecky and published by the World Bank, explores the risks of hidden debt and contingent liabilities in South Asia, focusing on public-private partnerships (PPPs), state-owned commercial banks (SOCBs), state-owned enterprises (SOEs), and subnational governments (SNGs). It emphasizes the need for better fiscal management, transparency, and policy reforms to prevent the next financial crisis in the region.

Main Points

1. Public-Private Partnerships (PPPs)

• Fiscal Risks: Early termination of PPPs can lead to significant fiscal costs for governments. These costs can reach up to 4% of government revenues in a profound macro-financial crisis.
• Distress in PPPs: PPPs in South Asia are more prone to distress than those in other regions. Projects such as railroads, treatment plants, and toll roads are particularly vulnerable.
• India as a Case Study: A large number of highway PPPs in India have been canceled, with a high rate of early termination. The report analyzes the contract design and risk management factors that contribute to these failures.
• Recommendations: Improve government capacity, due diligence, and contract design to reduce the likelihood of PPP failures and associated fiscal shocks.

2. State-Owned Commercial Banks (SOCBs)

• Dominance in South Asia: SOCBs account for a large share of total banking assets in South Asia, with India being the largest user.
• Performance Issues: SOCBs perform worse than private banks in terms of interest coverage, credit distribution, and profitability.
• Distress and Bailouts: SOCBs are more likely to enter distress, and when they do, governments tend to bail them out, leading to soft budget constraints.
• Ownership and Distress: The higher the government ownership, the greater the probability of bank distress.
• Recommendations: Implement fiscal rules, transparent reporting, and market discipline to reduce the reliance on SOCBs and mitigate the risks of financial distress.

3. State-Owned Enterprises (SOEs)

• Hidden Liabilities: SOEs in South Asia have large hidden liabilities that are often underreported or not fully accounted for.
• Fiscal Impact: The fiscal costs of SOE losses can be 8%–12% of GDP in some countries (e.g., Pakistan), which is several times higher than public spending on education.
• Concentration of Losses: In most South Asian countries, the top 10 loss-making SOEs account for over 80% of total losses, suggesting that the problem is concentrated and potentially manageable.
• Productivity and R&D: SOEs play a key role in long-term investment and R&D, which can generate positive externalities for the private sector.
• Recommendations: A combination of internal and external policy reforms is needed to better manage SOE contingent liabilities and improve financial accountability and corporate governance.

4. Subnational Governments (SNGs)

• Fiscal Decentralization Risks: While subnational governments are not in overall distress, they face significant contingent liability shocks.
• Frequency of Shocks: Over the past two decades, about 10% of subnational governments in South Asia have experienced contingent liability shocks.
• Impact on Local Economies: These shocks can lead to declines in local investment and economic activity, with effects lasting up to three years.
• Transparency and Fiscal Rules: Improved transparency, fiscal rules, and intergovernmental frameworks are crucial to managing these risks.
• Recommendations: Enhance fiscal reporting, market discipline, and intergovernmental coordination to reduce the risks associated with subnational debt and contingent liabilities.

Key Findings

• South Asian countries have greater exposure to hidden debt and contingent liabilities due to their heavy reliance on off-balance sheet operations.
• PPPs, SOCBs, and SOEs are key contributors to these risks.
• Fiscal costs from distressed public agents are substantial, potentially reducing fiscal space and affecting public spending on essential services.
• India has the highest level of SOE and SOCB liabilities, with distress in SOEs being more frequent than in private firms.
• Fiscal rules and transparency are essential for managing these risks and avoiding the tragedy of the commons in public finance.

Policy Recommendations

• Improve Contract Design and Due Diligence for PPPs to reduce early termination risks.
• Enhance Financial Accountability and corporate governance in SOEs and SOCBs.
• Implement Fiscal Rules and transparent reporting at the subnational level.
• Strengthen Intergovernmental Frameworks to ensure better coordination and risk sharing.
• Avoid Soft Budget Constraints by clarifying mandates and reducing reliance on government bailouts.
• Encourage Market Discipline to reduce the inefficiencies of state-led financial interventions.

Conclusion

The report underscores the urgent need for South Asian governments to address the hidden debt and contingent liabilities associated with SOCBs, SOEs, and PPPs. These risks threaten debt sustainability, productivity, and equity. A more transparent and accountable approach to managing these entities is necessary to prevent the next financial crisis. The tragedy of the commons in public finance is a key concern, and policy reforms that promote market discipline and fiscal responsibility are critical to achieving long-term economic stability.