Safe harbour: Looming insolvencies and State debts
Although separate, the announcements made by the Australian Institute of Company Directors to protect Australian directors whose companies are declaring insolvencies with 'safe habour' measures and the Nambawan Super Limited (NSL) to allow it to own shares in SOEs due to non-payment (compliance) of the Govt's component to contributors under the Superannuation Act, sums up an interesting last few weeks in the corporate circles. There is apparently, an ever widening national debt and deteriorating financial condition; all links in the great chain of Govt-business dependence.
The Corporations Act 2011 is an act of the Commonwealth of Australia that sets out laws dealing with businesses operating in Australia at federal and interstate levels. The equivalent in PNG is the Companies Act 1997. There have been recent changes made to the Companies Act to reflect prudent capital management and shareholders right.
How could such legal and business changes in Australia affect us? Firstly, the big banks namely ANZ, Westpac are incorporated and operated out of Australia. Lending facilities to most SOEs, amongst other businesses, are by one of these two apart from BSP. The terms of reference or covenance in these agreements are drafted in relations to Australian business and its capital markets, rendering it most stringent and first world compliant. Such measures include (specified) minimum debt service cover, minimum (specified) EBITDA interest cover, maximum (specified) Debt/EBITDA ratio and equity ratio to not be less than 50%.
Take for instance SOEs that are rolling out capital projects under Chinese Exim Bank loans for the Broadband Network (NBN) and the new airport. The State through the Treasury acts as a guarantor but the the debt is not sitting in Treasury's books - it is under the respective SOEs, who most probably need to finance a 15% counterpart-funding through debt from a commercial bank in order to access the facility. By the way, the current debt-to-GDP ratio ceiling of 32% may not cover these Exim debts (as they are under the SOEs books). It should really be much much higher!
With expected future losses, continuing negative cash outflow and working capital deficiency collectively give rise to a significant going concern for most SOEs. Availability of financial support by the shareholder KCHL and the continuation of financial facilities will be critical in the coming months.
It may become evident that most SOEs will likely fail solvency tests under the Companies Act 1997 due to liquidity constraints arising from negative working capital (negative working capital may be acceptable in certain industries but with the varying portfolio of Govt businesses and endemic national financial cash flow challenge), as most will be unable to pay debts as and when they are due in the ordinary course of business without further support.
As mentioned above in the facilities from these institutions, continual losses by SOEs may lead to breach of these (rather stringent) terms and conditions as they relate to results and equity. Most of the inherited assets from pre-corporation days have been tied to these banking facilities.
Financial prudence continues to be a challenge for PNG, especially when it comes to Govt and business. It calls for transparency and utmost duty of care by SOEs' management and boards to always act in the best interest of the corporation. We hope this ideal continues to be a beacon towards a safe harbour for all our SOE boards.