IMF says govt working on law to bring about improvements in SOEs

ISLAMABAD: The Pakistani authorities have been working on a State-Owned Enterprise (SOE) Governance and Operations Act that is aimed at enhancing the governance framework, management, and financial efficiency of the SOEs in the country, said the International Monetary Fund (IMF).

The IMF in its latest report, "State-Owned Enterprises in Middle East, North Africa, and Central Asia Size, Role, Performance, and Challenges" stated that as of March 2021, the Act has been approved by the Cabinet and submitted to the National Assembly.

An IMF technical assistance mission in early 2020 noted that the corporate governance of the SOEs in Pakistan was weak, which may explain-at least in part-the performance of the SOE portfolio, which displays low productivity and efficiency levels, which in turn generate substantial fiscal losses and contingent liabilities for the government.

It further stated that the existing ownership model is fragmented, with blurred roles between sectoral ministries and regulatory authorities in various sectors and a marginal role being played by the Ministry of Finance. This is the case in the energy sector-where the line ministry has the final say on tariff adjustments, in the aviation sector-where the regulator owns the civil aviation infrastructure, and in the financial sector-where the regulator is the majority shareholder of a systemic state bank.

Members on SOE boards also appear to be currently selected by different political stakeholders. Operational and financial performance targeting, and evaluation are lacking due to the absence of a well-designed performance monitoring system, which has given rise to unanticipated fiscal risks from SOE operations.

Internal audit functions have been weak and financial reporting has been riddled with several accounting exemptions that may have a significant bearing on the actual financial performance of the overall SOE portfolio.

The report further stated that the new SOE Act attempts to improve the performance of SOEs and limit the fiscal risks stemming from their operations by enhancing the corporate governance framework of SOEs.

With respect to ownership and regulatory arrangements, the Act lays the groundwork for a gradual move toward a more centralized model whereby the responsibilities of ownership and oversight are more concentrated in a newly created SOE unit in the Ministry of Finance, and to separate the regulatory and policy making functions of the state with regards to its SOEs.

The Ministry of Finance has already started to enhance its oversight functions with the publication of the "Federal Footprint - SOE Annual Report" to assess SOE portfolio risks in a more structured and more transparent way. For the selection of board members of SOEs, the Act proposes a "nomination committee" headed by the minister of the line-ministry in charge of the SOE along with four other members: the secretary of the division in charge, the finance secretary or his nominee, and two private sector experts with at least 20 years of experience.

Under this new model, the majority of the SOE board members are expected to be independent directors, while the governance functions of the SOE will be separated from management.

With respect to ownership policy reforms, the SOEs will have to set company mandates and strategies through a statement of corporate intent. An ownership policy document will subsequently integrate this framework and will clarify the processes for developing strategy and negotiating performance agreements as well as the respective roles of all involved institutions.

The reforms are also expected to strengthen the central role of the board in the oversight of SOE operations, and subsequently strengthen internal and external controls as well as reporting and disclosure standards.

In that respect, the new Act provides a timeline for compliance with IFRS accounting standards and requires the disclosure of non-financial information (for example, details of a PSO agreement) and the aggregate reporting on an annual basis at a minimum.

Under the new Act, the board of each SOE will be expected to adopt a three-year business plan every financial year, laying out targets, strategic direction, and operational and financial performance measures. This business plan mandated by the new Act is envisaged to serve as the performance agreement between the government and the SOE.

The report noted that in total, there are 213 federal-level SOEs operating in various economic sectors, made up of 85 commercial SOEs, 44 noncommercial SOEs (trusts, universities, training institutions, and welfare funds), and 84 subsidiaries of commercial SOEs. Despite holding sizeable assets, the SOEs share of employment is relatively low.

Total SOE employment, including financial SOEs, accounted for only about 0.8 percent of the formal workforce in fiscal year 2018-19. The overall revenues of all commercial SOEs in 2018-19 were about Rs4 trillion(10 percent of GDP), with total assets of about Rs19 trillion (50 percent of GDP).

Despite their important role in the economy, financial performance of many SOEs is weak, with one-third of them consistently generating losses (NHA, power sector distribution companies (DISCOs), Pakistan Railways, and Pakistan International Airlines that owns the Roosevelt Hotel in New York and the Scribe Hotel in Paris are among the major ones). Commercial SOEs recorded losses of Rs118 billion in 2018-19.

Performance of the SOE sector over the past few years, suggesting large persistent losses since fiscal year 2015-16. The report further stated that privatisation has slowed down over the past decade, with only five transactions taking place versus 167 transactions completed during 1991-2010.

The authorities have recently undertaken a comprehensive exercise to examine SOEs based on their functions and financial performance to identify those to be, (1) retained under state ownership; (2) restructured; and (3) privatised.

The authorities are planning to establish a Central Monitoring Unit with a central database and analysis of all the SOEs. The report noted that the SOE sector reform is a multiyear, multi-step process, involving numerous stakeholders.

The experience of Pakistan shows that while some work can be advanced in parallel, proper sequencing is necessary. The SOEs in Armenia, Jordan, and Pakistan account for a much lower share of total employment at under one percent. In several countries (Kazakhstan, Kuwait, Lebanon, Pakistan, and Tunisia) direct support takes the form of explicit subsidies or transfers.

Governments collect revenues from the SOEs mainly via direct taxes and dividends. More than half of budget revenues from the SOEs are paid in the form of taxes in Mauritania, Pakistan, Saudi Arabia, Tunisia, and Uzbekistan.

Pakistan, Qatar, and Saudi Arabia have also reported significant dividend payments in recent years, with dividends representing up to 80 percent of SOE payments to government in Qatar in 2018. The report further stated that during the Covid-19 crisis, Pakistan reported government revenue shortfalls due to lower revenue from the SOE sector.

Copyright Business Recorder, 2021