SOEs & IMF’s conditionalities

When Leonard Cohen sang Everybody Knows, he probably didn’t have Pakistan’s state-owned enterprises (SOEs) in mind. But everybody has long known the ‘boat is leaking’, and ‘everybody knows the captain lied’. Cumulative SOE losses have only increased over the last many years (see graph) with the combined losses of top ten loss making SOEs alone equaling 10 percent of federal tax collection in FY17. Not surprisingly, the IMF has laid out a host of SOE-related actions as its structural conditionality to the loan.

Steps towards at least one of those SOE related conditionalities have already been taken. Electricity tariffs have been revised, albeit as quarterly adjustment instead of baseline tariffs so it won’t directly reflect in CPI numbers. One can soon expect the government to draft amendments to Nepra Act to “ensure full automaticity of the quarterly tariff adjustments”, and to “eliminate the gap between the regular annual tariff determination and notification by the government”.

Making these amendments may be politically difficult, but administratively easy target to meet by Dec-2019 deadline relative to some other targets such as the audit of Pakistan Steel Mills and Pakistan International Airline by international auditors. Reportedly, sources say the entire records of these two organizations have to be audited. If that’s the case, the deadline of end-Dec 2019 looks too tight. Will the IMF give a waiver in such circumstances?

Be assured that the three pillars upon which the IMF program’s strategy is anchored includes “a strategy for cost recovery in energy and SOEs” and “modernizing the SOE legal framework”. The IMF is also not happy with the contingent liabilities from loss-making SOEs, to the extent not covered by government guarantees, represent additional fiscal risks (about 2 percent of GDP). “The program will aim to strengthen the transparency related to other types of contingent liabilities, such as in the context of power generation projects.”

In its Letter of Intent to the IMF, Pakistan has promised to initially undertake privatization of two newly commissioned RLNG power plants at Balloki and Haveli Bahadur; two specialized banks namely SME Bank and First Women Bank (FWBL); and two real estate assets namely Jinnah Convention Centre Islamabad and Services Intl' Hotel-Lahore. In addition, the government of Pakistan will be offering residual 18.39 percent equity in Mari Petroleum.

However, the deadline for these seven transactions already approved by the government has not been mentioned in the just-released IMF staff report. It is also interesting to note that the IMF has not given an explicit target to privatize certain number of SOEs; nor are privatization proceeds explicitly reflected in federal budget forecasts under program scenario.

Also missing from the document are deadlines for some of the critical inputs that will help achieve the SOE-related structural benchmarks. For instance, what are the deadlines to prepare the mitigation framework for labor-related issues, or to develop a public education and communications strategy to improve transparency aimed at getting a public buy-in for reforms.

Similarly, in so far as the conducting of triage of SOEs is concerned, the diagnoses and accordingly the classification of SOEs (see table) will be accurate if sector efficiency and competition assessments are prepared along with blueprints for revised market structures with separation of regulatory and operational roles. These studies will be needed to help the government classify these SOEs in the three categories and accordingly to prepare the road map for restructuring or privatization. However, the deadline for these studies which ought to be the basis of the so-called “triage” has also not been mentioned in the just-released IMF staff report.

At the risk of sounding cynical, promises made to the IMF are no guarantee of a change of fate. Similar promises have been made before as well. Yet time and again, Pakistan’s previous captains have failed to fix the sinking SOE ship: the military under General Musharraf, the PPP, and the PML-N – none have been able to turn around the picture, save for short-lived good performance led by a single messiah at the top.

The SOEs and their entire ecosystem were never overhauled when in fact Pakistan’s competitors have long been done with the privatization and liberalization process. Will today’s captains – the PTI – will be able to turn things around. Given the charged political environment, everybody seems to know – yet clinging to that last straw of hope. (See also: BR Research’s SOEs: elephants on the table Nov 27, 2018)