Even before the pandemic, the returns on assets of PEs had been trending down though their total profits were increasing. The profits were driven by massive asset expansion, such as heavy investment in the electricity sector, according to the IMF.
Both non-financial and financial PEs’ liabilities had increased quickly during the pandemic. Non-financial PEs’ liabilities increased by 31 percent from the FY 2018/19 to the FY 2020/21, and financial PEs increased by 44 percent in the same two years, driven by credit expansion. “Medium- and long-term loans, as well as other non-current liabilities, are the main drivers of these changes,” says the report. In addition, PEs’ unfunded liabilities and contingent liabilities which are both outside their balance sheet increased rapidly. The unfunded liabilities mostly arise from the employee benefits of PEs, including retirement benefits and other incurred benefits. About 80 percent of such liabilities are from the utility sector, mainly Nepal Electricity Authority (NEA). The contingent liabilities are mainly from the Deposit and Credit Guarantee Fund (86 percent of total contingent liabilities) due to its large amount of guaranteed credits. The recent global commodity price shocks further affected the financial performance of PEs. The NOC alone incurred 1 percent of GDP losses in the FY 2021/22 because the surging fuel purchasing costs were not fully passed through to domestic fuel sales prices. Compared with the pre-pandemic FY 2018/19, PEs’ contribution to fiscal revenue (income tax and dividends) declined by 0.16 percentage points of GDP in the FY 2020/21 and 0.23 percentage points in the FY 2021/22. At the same time, fiscal subsidies to PEs increased by 0.1 percentage point of GDP in each of these two years. Among the PEs, only nine have distributed dividends to their shareholders in the last fiscal year. Nepal Telecom, Rastriya Banijya Bank, Agriculture Development Bank, Butwal Power Company, Nepal Stock Exchange, Salt Trading Corporation, Citizen Investment Trust, Civil Aviation Authority of Nepal, and Sajha Sewa have distributed dividends from their profits. Nepal Telecom was the largest dividend payer with Rs 2.74bn in the last fiscal year. In addition to the direct budget impact, the fiscal risks from some PEs are also elevated. The federal government has a substantial credit risk exposure to PEs. By the end of the FY 2020/21, the government’s loans to the PE sector reached Rs 252.6bn (5.9 percent of GDP), a 0.9 percentage point higher than the pre-pandemic level in the FY 2018/19. In addition, the government still has three outstanding guarantees to NAC equivalent to Rs 34bn. As the financial situation of some PEs, such as NOC and NAC, has been worsening since the pandemic, the risks of the government’s credit exposure to those PEs have increased. That is, PEs are more likely than before to fail to repay their debt to the government and the guarantees to NAC are more likely to be called. Nevertheless, as 80 percent of the government’s loans go to NEA which is profitable, the risk of large-scale default in repaying the government’s loans is contained. As of now, there are currently 42 PEs in Nepal, of which 10 are in the industrial sector, four in the trading sector, nine in the services sector, five in the social sector, five are in the public utility sector, and nine PEs are in the financial sector. Their total assets reached 51 percent of GDP and liabilities 33 percent in the FY 2020/21. Among non-financial sectors, public utilities are the largest followed by the service sector and trading sector. Within PEs, the top ten PEs, in terms of their size of assets, are the Nepal Electricity Authority (NEA), Civil Aviation Authority of Nepal, Nepal Nepal Telecom, Nepal Oil Corporation (NOC), Industrial District Management, and Nepal Airlines Corporation (NAC), in addition to three public banks and the Citizen Investment Trust. They account for 94 percent of the assets and 91 percent of the liabilities of all PEs. As public enterprises (PEs) continue to bleed money, with no returns on the money invested from the state coffer, the government has formed yet another task force to reform such institutions. The government recently formed a committee under the leadership of former finance secretary Shankar Adhikari for reforming PEs. This is the third committee formed in the last four years to revive the ailing PEs. The last committee was formed in Nov 2021 according to the announcement in the federal budget presented by the then Finance Minister Janardan Sharma. The committee led by Joint Secretary Chandrakala Paudel was tasked to study the issue of either reforming PEs or transforming them into a company model. The Adhikari-led committee has been asked to suggest that it be taken by the government for the reform of public enterprises. Nepal Oil Corporation The financial situation of NOC has severely deteriorated in the FY 2020/21 and 2021/22. As the only company authorized to import petroleum products into Nepal, NOC imports exclusively from Indian Oil Corporation under long-term contractual arrangements. NOC does not suffer any competition from other operators in the marketplace. Therefore, its financial situation mostly depends on the structure of costs and price policy. NOC incurred losses of Rs 0.4bn in the FY 2020/21 and Rs 47.5bn in the FY 2021/22, compared with a profit of Rs 12.9bn in the FY 2019/20 due to the plunge of international fuel prices in 2020. The financial risks of NOC have thereafter increased significantly. “NOC’s overall risk ratings increased from category 2 in FY 2018/19 to 4 in the FY 2021/22, which implies its probability of being under financial distress has significantly increased from low to high,” says the IMF. Along with this, the risks related to profitability, liquidity, solvency, and government relationship have all jumped up. The quickly worsening financial situation was mainly due to the inability to pass through surging fuel import costs to domestic market prices. The surge in import fuel prices was not fully passed through to the domestic market due to the government’s concerns about the social and economic impact of high fuel prices. The more recent fall in global fuel prices has helped NOC recover a part of its loss but sustained profits are needed to recover its financial footing, according to the IMF. Even if NOC can return to the pre-pandemic level of profits, it will take more than three years to fully recover the accumulated loss and repay its loans. Nepal Airlines Corporation The financial situation of NAC was worrisome even before the Covid-19 pandemic. It incurred Rs 2.1bn (0.05 percent of GDP) losses in the FY 2018/19 with an accumulated loss of Rs 5.6bn by the end of that year. Its risk rating by SOE-HCT in that year was already high. Although its international flights have been profitable, its domestic flights continued making losses. The travel restrictions during the Covid-19 pandemic impacted the business operation of NAC dramatically. The sudden shrinking of the passenger business severely impacted NAC’s earnings while its costs could not be reduced at the same scale. As a result, NAC’s losses widened to Rs 3.9bn in the FY 2019/20 and Rs 4.9bn in the FY 2020/21. Although passenger business recovered as the Covid-19 pandemic dissipated in the FY 2021/22, NAC’s loss was only reduced to Rs 2.8bn. NAC’s total liabilities have exceeded its total assets since FY 2020/21, resulting in negative equity which only worsened in FY 2021/22. Overall, while NAC’s risks profile suggests that risks were elevated already before the pandemic, risks have further increased in some categories. The government has large credit risk exposure to NAC. By the end of FY 2021/22, the government had provided NAC loans with an outstanding value of Rs 3.6bn and Rs 34bn in debt guarantees. The total amount of loans as of FY 2021/22 from nonbank financial institutions exceeded their initial values, suggesting that the NAC may have faced difficulties in servicing its loans. Nepal Electricity Authority Compared with other PEs, and despite government policies to support electricity use, NEA’s financial situation was not severely impacted by the pandemic. NEA’s core businesses of electricity generation, transmission, and distribution do not necessarily require close contact and are thus not very sensitive to the pandemic. The main channel of the pandemic impact was shrinking electricity demand, especially during the lockdown period. NEA’s financial performance improved as a result of the global fuel price shocks. In the FY 2021/22, NEA’s total profits reached a historic high of Rs 16.1bn. This was due to strong electricity demand amid the fuel price surge. As NEA’s thermal power plant capacity accounts for only 8.1 percent of its total electricity generation capacity, the global fuel price shocks had a limited impact on its electricity generation costs. Overall, with the recovery of accumulated losses and sustained profits after the FY 2018/19, NEA’s financial position has improved. However, NEA still faces financial challenges. While NEA’s profits have increased, its capacity to repay debt remains under pressure. For example, NEA’s debt to earnings before interest, tax, depreciation, and amortization (EBITDA) had come down from 24.3 in the FY 2018/19 to 17.1 by the end of the FY 2021/22. This is still way above the threshold for the high-risk category which is defined as five in the SOE-HCT and thus NEA is classified in the highest-risk category for this indicator and also the related indicator of debt coverage. However, such risks are partly mitigated by the fact that most of NEA’s liabilities are loans from the government, two-thirds of which are on-lending of external concessional loans. Furthermore, NEA’s unfunded liabilities (mainly pension liabilities) also increased to 0.7 percent of GDP by the end of FY 2020/21. NEA’s liquidity management also needs improvement as both the debtor turnover days and creditor turnover days are classified in the highest risk category. There are also risks related to power purchase agreements (PPAs). NEA had signed 357 PPAs with various independent power producers (IPPs) by the end of FY 2021/22. The combined installed capacity reached 6,366 megawatts (MW). Most of these PPAs used the provision of take-or-pay, under which the NEA has to buy the contracted amount of electricity or pay a fine. They create long-term expenditure commitments. There are currently additional 269 PPA applications with a total capacity of 11,740 MW which could bring the total capacity to 18,106 MW in the coming years. According to the Water and Energy Commission Secretariat’s Electricity Demand Forecast Report (2015-2040), electricity demands have a wide range of possibilities, e.g. 5,787 MW-10,803 MW in 2025, 8,937 MW-18,371 MW in 2030, and 19,151 MW-51,330 MW in 2040. If the electricity demand falls short of expectations, NEA may incur losses from such agreements.
