SOE reform: strengths and flaws

Pakistan’s state-owned enterprises have long been one of the weakest links in our economic governance. They have absorbed public money, accumulated losses, built circular debt, weakened service delivery, delayed reform and shifted the cost of failure to taxpayers.

The problem is not simply that some SOEs lose money. The deeper problem is that many of them operate without the discipline of ownership, without professional boards, without clear commercial mandates, without timely accountability and without consequences for failure.

This is why the State-Owned Enterprises (Governance and Operations) Act, 2023 and the SOE Ownership and Management Policy, 2023 are important reforms. For the first time in many years, Pakistan has attempted to create a coherent framework for the governance, monitoring, performance and restructuring of federal SOEs.

But this reform must also be understood honestly. The SOE Act 2023 and the related policy framework, designed with the assistance of the Asian Development Bank, were not born primarily out of Pakistan’s own internal reform conviction. They were largely pushed by IMF programme conditionality and external pressure. This is a familiar weakness in Pakistan’s reform history: we comply to satisfy lenders rather than reform to address deep-rooted problems with proper diagnosis and because we are convinced of the benefits.

That difference matters. Compliance produces documents, committees and reports. Conviction produces implementation, consequences and institutional change.

The new SOE framework has many strengths. It defines SOEs and commercial SOEs. It clarifies the role of the federal government as owner. It creates the Cabinet Committee on SOEs as a high-level oversight forum. It establishes the Central Monitoring Unit in the Finance Division. It requires business plans, Statements of Corporate Intent, audit committees, internal controls, risk management, performance monitoring, board evaluation and public service obligation costing.

This is a significant improvement over the old system where ownership, regulation, policy, financing and operational interference were often mixed together. In the past, ministries treated many SOEs almost as attached departments. Boards were weak. CEO was effectively appointed by the Governments thus making board largely rubber stamp. Management was not always empowered. Financial losses were hidden through subsidies, guarantees, loans, circular debt and delayed payments. Public service obligations were imposed without being properly identified, costed or funded.

The creation of the Central Monitoring Unit is particularly valuable. Pakistan has suffered for decades because the government did not have a consolidated, timely and credible view of SOE performance, fiscal exposure, subsidies, guarantees, loans, circular debt, contingent liabilities and public service obligations. The CMU can become the government’s analytical brain for SOE reform.

This role must be strengthened. The CMU should not merely collect data. It should become a serious performance and governance-monitoring and fiscal-risk institution. It should be able to tell the government which SOEs are viable, which are well governed, which ones are draining public resources, which boards are failing, which business plans are unrealistic, which PSOs are unfunded, and which entities should be privatized, restructured, merged, concessioned or closed.

Another important strength is the requirement for a Business Plan and Statement of Corporate Intent. These should not be treated as paperwork. In a well-governed SOE, they are the central accountability documents between the owner, the board and management. They should state clearly what the enterprise is expected to achieve, how performance will be measured, what risks it faces, what government support it needs and what public service obligations it is carrying.

The PSO framework is also necessary. Many SOEs are blamed for losses that are actually policy costs imposed by government. If the government wants an SOE to provide services below cost, serve uneconomic areas, delay recoveries, maintain unviable operations or carry social obligations, then the cost must be made explicit. A PSO is not charity. It is a public policy service purchased by government and delivered by an SOE. It must be identified, costed, approved, funded and disclosed.

So the framework is not without merit. In fact, it is the most serious SOE governance framework Pakistan has had and a significant improvement on 2013 Governance Rules applicable to public sector companies.

But it also contains fatal flaws.

The first fatal flaw is the composition of the Board Nominations Committee (BNC). The BNC is effectively composed of the sector minister, the secretary of the relevant ministry and the finance secretary. This may look administratively convenient, but from a governance perspective it is a serious weakness.

There is no independent member with deep knowledge of corporate governance, board effectiveness, SOE reform, finance, risk, human capital assessment or sectoral transformation. In Pakistan’s culture, this matters enormously. A government-dominated nomination structure can easily produce politically acceptable boards where friends of people at the helm may be accommodated rather than professionally capable boards.

Board quality is the foundation of SOE reform. If boards are weak, compliant or politically influenced, the rest of the framework becomes a formality. Business plans become decorative. Audit committees become procedural. Statements of Corporate Intent become disclosure exercises. CMU reporting becomes a post-mortem. Commercial discipline remains weak.

The second fatal flaw is the continuation of ex-officio directors. This is a major governance weakness. There is nothing wrong with inclusion of one or two public servants in the board, but they should be selected based on their capabilities for the entire tenure of the board. An ex-officio director is effectively appointing the office, rather than the individual with required skills, time, judgement and fiduciary responsibilities.

When the officer is transferred, the board member changes. Continuity is lost. Accountability is blurred. More importantly, the person may continue to think like a representative of the ministry rather than a director of the company.

This is contrary to the basic principle of corporate governance. Once a person becomes a director, his or her duty is to the company. Not to the ministry. Not to the minister. Not to the appointing authority. The director must act in the interest of the company, exercise independent judgment, protect all shareholders and discharge fiduciary duties.

Ex-officio directorship weakens this principle. It brings ministry thinking into the boardroom and makes it harder for boards to resist informal directions, unfunded obligations, politically driven priorities and weak commercial decisions.

The third fatal flaw is lack of skin in the game. This is not just a Pakistani problem. It is a structural weakness of the SOE model itself.

In private enterprise, ownership creates discipline and most of the directors have stakes in the company. Shareholders/directors bear losses. Investors demand returns. Boards face pressure. Management is rewarded for performance and punished for failure. Capital is at risk.

In most SOEs, this discipline is missing. Directors do not meaningfully benefit from value creation. Nor do they usually suffer meaningful consequences when the enterprise performs poorly. Management may survive failure. Boards may survive failure. The government may inject equity, issue guarantees, approve subsidies, provide loans or absorb circular debt. The real loser is the taxpayer.

This lack of ownership discipline produces slow decisions, weak accountability, risk avoidance, tolerance of inefficiency and little urgency for restructuring. This is why privatization of most commercial SOEs is imperative and should be expedited. The argument is not ideological. It is governance-based. Private ownership creates consequences. SOE ownership often defuses them.

For commercial SOEs that are not genuinely strategic or essential, the government should not try to become a better businessman. Well-settled principle that it is not the business of the government run the business remains valid and fundamental to the SOE reforms. The Government’s role is that it must regulate well, protect consumers, fund genuine PSOs transparently and move ownership to those with capital at risk.

The fourth fatal flaw is weak PSO discipline. The framework recognises PSOs, but Pakistan has a long history of imposing public policy burdens without paying for them. Unless there is a hard rule that no commercial SOE will carry an unfunded PSO, the framework will fail. Directions to supply below cost, continue non-commercial services, expand to uneconomic areas or delay recovery must be formally identified, costed, approved and funded. Unfortunately, despite major emphasis on PSO being separately identified, reported and funded by the government, there is evidence of any cases where it has been done. There is a major risk that this part may just remain on paper.

The fifth fatal flaw is weak consequence management. Pakistan is very good at producing laws, policies, committees and reports. It is much weaker at enforcing consequences. What happens if a board fails? What happens if some of the directors clearly indulge working for political or self interest violating the Conflict of Interest Principles? What happens if an SOE misses its targets? What happens if a ministry interferes? What happens if PSOs are not funded? What happens if directors lack competence or integrity?

If nothing happens, the reform becomes another compliance exercise.

There is also a sixth weakness: institutional bandwidth. The Cabinet Committee on SOEs is expected to monitor implementation of the law, review performance, consider board appointments, examine PSOs, approve restructuring proposals and push privatization. This requires sustained attention and accountability. Yet the committee meets infrequently and is chaired by the finance minister, whose time is already consumed by IMF reviews, budgets, debt servicing, revenue shortfalls, circular debt, fiscal pressures and weak public financial management.

SOE reform cannot be a side assignment of an overburdened Finance Minister and Finance Secretary. Since most commercial SOEs that are not strategic or essential should ultimately be privatized, restructured, listed, concessioned or exposed to private capital, this portfolio should be more closely aligned with privatization. The Finance Ministry should retain fiscal-risk monitoring through the CMU, but the reform and transaction agenda needs a dedicated political champion with time, authority and urgency. Therefore, more appropriate place for this portfolio of SOEs is the privatization commission.

Pakistan has created a good framework. But frameworks do not reform institutions. Incentives do. Capable boards do. Independent judgment does. Transparent data does. Consequences do.

The real test is simple: will the state behave like a disciplined owner, or continue to act as a political patron, informal operator and lender of last resort?

If Pakistan fixes board appointments, phases out ex-officio directorships, empowers CMU, funds PSOs transparently, enforces consequences and accelerates privatization of non-strategic commercial SOEs, this framework can become a turning point.

If not, it will become another well-written reform document — admired in presentations, cited in IMF reviews, and ignored in practice.

The real risk is that Pakistan may treat SOE reform as another IMF checkbox rather than as a national economic necessity. That would be unfortunate. It is because SOE reform is not being done for the IMF. It is needed for Pakistan — for taxpayers, consumers, investors, public finances and the credibility of the state itself.

Copyright Business Recorder, 2026