ISLAMABAD: Ministry of Finance (MoF) has prepared a draft policy on governing of poorly performing State-Owned Enterprise (SOEs) as per the agreed IMF’s Structural Benchmark in the sixth Review MEFP of EFF (2019-22) with collaboration of Asian Development Bank (ADB), official sources told Business Recorder.
According to Finance Ministry, Pakistan officially has 206 SOEs; most of them are performing poorly. SOEs contain a number of subsidiaries of other SOEs and enterprises that would not normally be considered SOEs as they are not required to operate under a commercial mandate. About 57 to 60 of the SOEs are considered material, which together control over 97% of assets held by all 206 entities.
A high-level assessment of the current legal framework for SOEs conducted as part of this diagnostic suggests that generally the governance and accountability arrangements applying to the SOEs are opaque which has meant that poor performance has not been recognized and the performance drivers are hard to identify. SOE service delivery is generally weak which is also reflected in their operational performance. Some SOEs require ongoing fiscal support.
The 2019 IMF report notes that contingent liabilities from SOEs, to the extent not covered by government guarantees, represent additional fiscal risk, about 2 percent of GDP. In creating SOEs, government has a responsibility to ensure that they are run efficiently and in the best interest of their ultimate owners, the people of Pakistan.
Poorly performing SOEs place a heavy burden on Pakistan’s economy. They absorb large amounts of scarce capital on which they provide very low returns, divert government resources away from vital social investments in health and education and drive up the costs of doing business where they are the sole service providers. SOEs, which should be expected to generate a commercial return on the government’s investment, have instead generated operating losses and often failed to prepare required financial reports.
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Finance Ministry has acknowledged that by any measure the performance of Pakistan’s SOEs is poor. The portfolio Return on Assets (RoA) in FY-2019 was just -1.37% while portfolio return on equity (RoE) was 5.16%, well below what would be considered a commercial return of between 8% to 20%, depending on the risk factor of the SoE’s business.
Power utility SoEs would be expected to return 6 to 8% ROA, while higher risk SOEs, such as those involved in service delivery, could be expected to achieve over 20% ROA.
Total negative equity carried by the commercial SOEs is Rs1.373 billion which is a direct and immediate claim on the government’s fiscal position and limits the government’s ability to invest in more important social priorities such as health and education.
Finance Ministry notes that one of the factors which led to poor performance of SOEs is that public servants dominate many Board and Directors are not empowered to function effectively due to high levels of inappropriate political influence and often lack the professional skills required to properly undertake their roles.
SOE ownership monitoring is decentralized amongst twenty ministries and agencies. Where line or sector ministries are responsible for the ownership monitoring of SOEs operating within their sector it creates an irreconcilable conflict of interest. It also makes it difficult to develop a centre of excellence in SOE monitoring and ensure a consistent approach to SOE oversight and consistent reform policies and practices.
There are numerous forums and public sector accountability organizations that intervene in the affairs of SOES. These multiple layers of accountability distort and undermine the performance and accountability systems.
The Ministry maintains that there is a lack of transparency and accountability. Requirements relating to the preparation of a forward-looking business plan are weak and many SOES do not publish their annual reports on their websites as required by the public Sector Company Corporate Governance Rules 2017.
Transparency leads to accountability and accountability influences behaviour. Lack of transparency creates an environment where poor practices can continue unchallenged. The financial information contained in the SOE Annual Report prepared by the Economic Reforms Unit in the Ministry of Finance is based mostly on 2019 accounts, which are already out of date.
All Ministries/ Divisions will undertake an exercise within two months of the approval of this Policy to submit a categorization and reform plan for the SOEs under their responsibility. The categorization and reform plan shall list SOEs according to the following criteria: (i) Strategic SOEs; (ii) commercial SOEs to be privatized (or divested); (iii) SOEs to be reformed and retained in the medium-term; and (iv)SOEs to be reformed prior to privatisation.
SOE reform shall include but not be limited to restructuring and merger of some SOEs, entering into PPPS, contracting out operations and asset sales. Each categorization and reform plan will include rationale for the categorization and reform recommended and a timeline to implement the reform.
Ministry in Charge- The Division to which the business of a SOE has been allocated under the Rules of Business, 1973 shall coordinate with the Board of such state-owned enterprise to ensure compliance with the provisions of this policy and SOE Act, including, without limitation, with respect to the development of the Business Plan, Statement of Corporate Intent (SCI), the Annual Reports, timely establishment of systems of internal controls of the state-owned enterprise, appointment of the Chief Executive Officer, and reporting to the central monitoring unit.
In addition, the Ministry in Charge will also be responsible for: (i) ensuring that the plans are in line with sectoral policies and government priorities; (ii) assessing the fiscal and financial implications of the business plans; (iii) participating in the Board Nominations Committee to select board members of SOEs in the respective sectoral sphere; (iv) monitoring on a periodic basis the operating results and financial performance of the sectoral SOEs to ensure that targets are being faithfully pursued, and report to the CMU on a quarterly basis; and (v) establishing a rigorous performance monitoring mechanism to evaluate performance of board members (ex-officio and independent).
The draft policy indicates that Ministry of Finance will establish a central/ electronic database of information on the performance of every SOE. The Central Monitoring Unit (CMU) will be established in the Ministry of Finance to develop this database and undertake the role of SOE ownership monitoring on behalf of the Ministry of Finance and Federal Government. Ministry of Finance will ensure the hiring of professionals in the areas of corporate finance, corporate law, strategic planning and management, and capital market to serve as CMU staff members.
CMU will analyze the draft business plan and will present their analysis and recommendations to the concerned ministries and Cabinet Committee on State Owned Enterprises (CCoSOEs) for consideration. CMU will develop a monitoring framework for the SOEs against the benchmarks agreed in the business plans. The annual consolidated monitoring report of SOEs will be published on the website of the Finance Division.
Finance Division in consultation with the Law Division and other stakeholders will submit a framework to exempt commercial SOEs (as notified by the Federal Government) from the compliance of Public Procurement Regulatory Authority (PPRA) rules. However, in case of such exemption the commercial SOEs will follow good practice principles of procurement such as competition, transparency, and efficiency.
Finance Division in consultation with Law Division will develop a mechanism to reduce unnecessary interventions by investigative agencies and frivolous litigations against Directors, CEOS, and Staff of SOEs.
To improve the efficiency and access to capital it is imperative that all SOEs pursue private capital and private management expertise either through partial privatisation, contracting out, or public private partnerships under the P3A Act 2021 as and when deemed appropriate. As part of the development of the consolidation and reform plans, SOEs will assess the merits of using PPPS as a procurement option.
SOEs should not continue to operate in sectors where the private sector has potential to deliver goods and services in a competitive environment. In all sectors, the government will proactively introduce competition so that any SOE operating in that sector shall not have a dominant market position.
CEOS of SOEs will be appointed as PAOs for the respective SOEs to improve accountability framework and financial management in SOEs.
Ministry of Finance, in consultation with Auditor General of Pakistan will issue a detailed framework for financial management of SOEs that are not registered with the SECP. All SOEs, attached commercial departments and corporations/ bodies will establish internal control mechanisms under the supervision of their respective Boards.
Debt Policy Coordination Office (DPCO) of the Ministry of Finance in consultation with the CMU will issue a risk analysis report on contingent liabilities of SOEs on an annual basis to be presented to the Cabinet and published on the website of CMU Finance Ministry. Every SOE will clearly state and publish in their annual report all contingent liabilities, guarantees provided by the government, or third parties on behalf of government, and any loans or other financial support provided by government or other SOEs.
Finance Ministry has sought comments from over two dozen stakeholders including Ministries so that final policy is presented to the Federal Cabinet for consideration and approval.
Copyright Business Recorder, 2022
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