The government would like the citizens to believe that plans to reform public sector enterprises (PSE) are in full sway. The reality is entirely different.
In 2014, the government took assistance from the Asian Development Bank for PSE reforms under the project titled “Pakistan: Public Sector Enterprise Reforms Project”. This project loan was approved by the ADB in December 2014.
Under that programme, the SECP had to put an IT system in place for online filing system and corporate finance database. It was also supposed to appoint an international corporate governance expert to assist SECP in setting up a unit to monitor compliance with the PSE Corporate Governance Rules (CGR) 2013. The apex regulator was also tasked to develop a results-based scorecard to assess implementation of corporate governance rules 2013, whereas it was also supposed to prepare regular (annual) reports on PSEs compliance with the CGR 2013.
Three weeks ago, BR Research inquired about the progress of these reforms steps from the SECP. Their answer: “the arrangements envisaged under the ADB project loan documents have not yet been executed by the relevant quarters. Accordingly, desired feedback for your questions may be treated as NIL.” For those wondering, the ‘relevant quarters’ in this case is the Finance Ministry.
A similar query was made to the ADB. As per ADB’s 2014 PSE reform project documents, 10 PSEs were to be privatised under the porgramme. Likewise, a mitigation framework for labour related issues was to be finalised by December 2015, whereas a communications strategy was to be developed to improve transparency aimed at getting a public buy-in for reforms. The project also planned for annual consumer surveys to be designed and conducted towards the strengthening of the privatisation programme.
Replying to most of these queries in October 2015, the ADB had said the government of Pakistan had not finalised its end of the affairs. For instance, framework for labour related issues had not been finalised; nor had the government selected the sector for which the ADB were to provide blue print of competition assessments in the form of reports.
Answering similar queries about PSE reform project this time around, the ADB instead informed that the government had requested them in 2015 to provide a comprehensive policy-based loan to facilitate PSE reforms in Pakistan instead of the project loan approved in December 2014.
Accordingly, a policy-based loan was processed with two subprograms of $300 million each. The loan covers only federal government PSEs. The first subprogram was approved in June 2016 and the second subprogram was approved on 22 June 2017.
It must be noted, however, that both 2014 project-based assistance and its re-hashed version of policy-loan approved in 2016 have similarities. Like the former, the latter also contains plans to develop policies to address labour issues and a communication strategy. Both also contain outputs to improve the transparency, monitoring and corporate governance of PSEs. The new policy loan also includes an output to establish a conditionality framework for fiscal transfers to public sector enterprises, and upgrading the quality of economic regulatory institutions.
In response to BR Research’s questions about progress on these outputs, many of which weren’t entirely new to the new version of the PSE reform loan in 2016/2017, the ADB conveniently remained silent. Sources in the Finance Ministry and the SECP report state that progress on these fronts has been no more than a damp squib.
Meanwhile, this weekend the SECP has published the names of those PSEs that have failed to file the Statement of Compliance (SoC) with the CGR 2013 for years ending June and December, 2016.
It is disconcerting to see that the published list of non-filing 55 PSEs contains some of the biggest names that were required to file the SoCs. Some of the big and important PSEs that have not filed their SoC include the likes of National ICT R&D Fund, LESCO, Nandipur Thermal Power Generation Co, NTDC, Pakistan Steel Mills, and Utility Stores Corporation.
Whistle-blowers from the Finance Ministry have even more disturbing things to report. In documents available with BR Research, whistle-blowers have flagged that the filing of statement of compliance by the PSEs does not mean that those PSEs have indeed complied with the CGR 2013.
“A host of non-compliance with the provisions of the rules has been found, even though the PSEs have filed the SoCs,” one source said on the condition of anonymity. Most PSEs have not been submitting review report by the auditor, year after year. This means that there is no reason to believe that the PSEs that do not feature in the SECP’s just-released list do in fact follow the CGR 2013.
Even show cause notices sent to the non-complying PSEs, and hearings thereof, have only been sent for the filing of Statement of Compliance, rather than actual compliance. This is largely because the policy reform matrix given to SECP by the ADB itself focuses on the filing of SoC rather than actual compliance.
“For instance, some line ministries are the appointing authorities for appointing the board, but they are not following fit and proper criteria notified by the CGR 2013 rules. Other line ministries are not appointing independent directors, and in fact some PSEs have sitting MPAs/MNAs on the board, in clear contradiction of the law.” This list doesn’t only contain the proverbial white elephants but also the profitable ones such as the GHPL.
In other cases, the board is independent, but it is not empowered because it hasn’t not been given the power to appoint the CEO, the company secretary, the CFO, and internal auditor. “An analysis of the statement of compliance for the years 2014 and 2015 shows that the regulator and the management of the PSEs are too slow to implement the rules of PSEs CGR 2013,” the source said.
Since most non-compliance fell into this category, the government recently relaxed the corporate governance provision and allowed line ministries to appoint the C-level staff, a privilege that was only the boards’ in previous version of the CG rules.
The corporate governance rules 2013 were supposed to be the first step on the long road and winding road towards PSE reforms. Yet more than three years later, those first steps are still not steady. It takes more than just rules to fix the PSE; it takes strong will and great skills, ingredients that are in short supply in the current cabinet. In the face of will-skill deficits and poor progress on PSE reform thus far, the question is why is the government taking huge loans from the ADB?
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