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ISLAMABAD: The World Bank has said that the formation of the Pakistan Sovereign Wealth Fund, valued at about $8 billion, creates governance and public financial management challenges because the state-owned enterprises (SOEs) transferred to this Fund are exempted from the SOE Act’s best corporate governance practices.

The bank in its latest report, “Pakistan Development Update: Fiscal Impact of Federal State-Owned Enterprises” released on Tuesday, stated that the SOEs within the SWF should be classified as commercial SOEs and be governed by the SOE Act and Policy.

All SOEs, including those under the State Wealth Fund (SWF), should be covered under the purview of the SOE Act to ensure financial transparency and good corporate governance practices, the Bank recommended.

PSWF given ownership of 7 profit-making SOEs’ assets

In August 2023, the government set up SWF to support long-term economic growth aimed at managing assets of large profit-making SOEs by using the best global practices to ensure such assets grow and benefit the people over the medium to long term.

There are seven entities that have been transferred to the SWF under the SWF Act, 2023, all of which are profit-making SOEs or the subsidiaries of SOEs: Oil and Gas Development Company Limited (OGDCL), Pakistan Petroleum Limited (PPL), National Bank of Pakistan (NBP), Pakistan Development Fund, Government Holdings Private Limited, Mari Petroleum Company Limited, and Neelum Jhelum Hydro Power Company Limited.

The bank stated that dividends from OGDCL, PPL, NBP, and Government Holding Private Limited have been significant, at around 0.05 per cent of GDP. A clearly defined dividend policy for SWF is critical. Further, the transfer of these four SOEs may significantly change the outlook of the SOE portfolio. In the fiscal year 2022, these four SOEs accounted for 42 per cent of total profits and 12 per cent of total assets in the portfolio.

The bank stated that if the government owns and controls the SWF, the SWF itself could be designated as a commercial SOE to ensure appropriate oversight and alignment with best corporate governance practices. The government should ensure adequate governance arrangements are introduced for the newly created SWF to safeguard assets and stakeholders’ interest.

The government should plan an annual evaluation of the SWF against its mandate. Further, the Government should consider the SWF for membership in the International Forum of Sovereign Wealth Funds (IFSWF) and adopt to IFSWF’s performance and reporting standards.

The World Bank Update highlights the high fiscal costs of SOEs operating in key sectors of the economy. These SOEs have been consistently making losses since 2016, and the government has been providing significant financial support through subsidies, grants, loans, and guarantees, leading to large and growing fiscal exposure.

Copyright Business Recorder, 2024

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