In yet another step towards the formal revival of the International Monetary Fund (IMF) loan programme, the government is set to introduce in parliament a fresh bill for the restructuring, liquidation and privatisation of state-owned entities (SOEs).
The government has finalised the draft SOE Bill with the close coordination of the IMF, Asian Development Bank (ADB) and the World Bank to ensure better management of the SOE portfolio.
As part of the process, the government last week finalised a triage of 84 out of a total of 212 SOEs that would be prepared in the first phase of restructuring for ultimate privatisation, liquidation or retention in the public sector to meet a structural benchmark of the IMF.
The overall revenues of all these 84 SOEs in 2018-19 amounted to about Rs4 trillion while the book value of their assets stood at Rs19tr. The revenues in 2018-19 were roughly 10 per cent of nominal GDP, providing employment to more than 450,000 people (0.8pc of the total workforce), according to the Ministry of Finance.
The government plans to retain its ownership in 14 entities. However, these require immediate reforms and possible restructuring
The proposed law will introduce structured governance reforms in the management and oversight of the SOEs. Through this proposed legislation, the boards of directors of the SOEs will be given more autonomy in terms of decision-making in addition to ensuring the separation of the office of chairman from that of the CEO in all SOEs, including entities established through special enactments. Moreover, the role of the line ministries and divisions will be streamlined for operational autonomy of the SOEs.
Even before the legislation, the Ministry of Finance has initiated steps for the establishment of a Central Monitoring Unit (CMU) within the Ministry of Finance, which will function as the central database and analytical unit for all the SOEs and will report directly to the federal government through the finance minister. The unit will be staffed with experts to be hired from the market and necessary resources for its working will be provided.
The CMU will have access to necessary financial and non-financial information of each SOE and the business plans and target performance outcomes. The unit will prepare periodical performance evaluation reports of the SOEs and assist the federal government on matters of critical importance for better management of SOEs and their improved performance.
The Ministry of Finance has already started working on an SOE Ownership and Management Policy with technical support from the ADB and the IMF. So far, no policy framework exists in Pakistan that covers the entire SOE portfolio. This appears to be a departure from the previous concept of an umbrella organisation (Sarmaya Pakistan) given the fact the various SOEs had their peculiar challenges and solutions and could not be addressed through a one-size-fits-all solution.
To address the current policy gap and the diversity of sectors and legal and institutional frameworks in which the SOEs operate, the government now intends to develop a policy to manage these SOEs through a coherent and institutionalised arrangement. The clarity on the ownership rationale of SOEs, the role of the federal government as shareholder and the manner of the exercise of the ownership function, the respective roles and responsibilities of the federal government, line ministries and the boards of SOEs, frameworks of competitive neutrality and public-sector obligation, and necessary reporting and decision-making processes will be important components of the proposed policy.
There are 14 entities that are planned to be retained under government ownership but require immediate reforms and possible restructuring. Among them are Pakistan Railways and Pakistan International Airlines, which were collectively making a loss of Rs88 billion in FY2018-19. They are already under an active restructuring and reform process.
The finance ministry said these were not performing core functions as covered in the Public Policy Framework and, therefore, are recommended for privatisation or liquidation. There are 10 SOEs, which are already on an active privatisation list and are at various stages of the privatisation process. About 34 more entities will be gradually added to the list but none of them may reach the sale counter during the term of the current government and may be ready by June 2023 to 2025.
Pakistan Steel Mills is an important entity on the active list and is at an advanced stage of the privatisation process. SME Bank is another loss-making SOE, which is on the active privatisation list. In addition to these, partial divestment of Oil and Gas Development Company and Pakistan Petroleum is also underway.
The Ministry of Finance has reported to the cabinet and the IMF that a total of 25 SOEs, which earned cumulative profits of Rs107bn in 2018-19, would be retained by the government for supplying goods and services, serving national or economic interest, set up under G2G arrangement, essential infrastructure services requiring large investments, national food security, national defence or security etc.
Another 14 companies are also retained in the public sector and will be restructured. There are about 10 other companies that have been described as potential candidates for privatisation while one entity — Industrial Development Bank Limited — is currently under liquidation.
The ministry said that four companies having total profitability of Rs51.4bn in 2018-19 were financially viable and would be retained in government hands. These include Government Holding Ltd (Rs34bn profit), Pak Arab Refinery (Rs12.3bn), Pak-Kuwait Investment (Rs4.7bn) and Pakistan Revenue Automation (Rs146 million).
The ministry said that despite their important role in providing essential public goods and services, the financial performance of several SOEs had remained unsatisfactory. In 2018-19, these 84 commercial SOEs collectively recorded net losses of Rs143bn, down from Rs287bn in 2017-18. The improvement in SOEs performance was driven by government policies, including robust business growth in local upstream oil and gas markets translating into significant gains for oil and gas companies, and policy reforms and operational improvements in the power sector leading to timely tariff notifications.
Over the past six years, one-third of the commercial SOEs experienced losses intermittently. Moreover, the sum of the losses of top-10 loss-making SOEs contributed around 90pc to the total losses of SOE portfolio each year. National Highways Authority, Pakistan Railways, PIA and power-sector distribution companies had been among the top 10 loss-making SOEs.
Among the SOEs performing core functions, 25 SOEs were profitable in 2018-19. Another 19 entities had been consistently profit-making during the last three years — 2016-17, 2017-18 and 2018-19 — however, their returns on assets had been lower than the threshold. Two more SOEs — Central Power Purchasing Agency and Pak-Iran Investment Company — have positive equity and were profitable in 2016-17 and 2018-19.
Published in Dawn, The Business and Finance Weekly, , March 8th, 2021