Between FY16 and FY23: fiscal support to SOEs escalates to Rs5.7trn, says SBP

KARACHI: State-owned Enterprises (SOEs) in Pakistan are posing a significant challenge to the economy, having consistently reported net losses over the past eight years and this persistent underperformance has resulted in cumulative fiscal support escalating to Rs 5.7 trillion or 1.4 percent or GDP by FY23, creating additional risks to fiscal sustainability.

According to the State Bank of Pakistan (SBP) to minimise losses and alleviate fiscal strain, reforming SOEs is crucial. This reform should concentrate on sector-specific policies, cultivate a competitive environment, and implement effective regulations, all bolstered by a strong political consensus. By prioritizing these areas, Pakistan can enhance the efficiency and sustainability of its SOEs, leading to broader economic benefits.

SBP in its recent report has discussed the performance of SOEs o including a special chapter on ‘Reforming SOEs in Pakistan’ that sheds light on the country’s historical and current experience of SOE reforms.

Macroeconomy: Structural challenges persist: SBP

The report said that SOEs gained significance for accelerated economic development by establishing industrial base and undertaking large infrastructure projects and SOEs have been reformed around the world since the 1980s, driven in part by their unsustainable fiscal impact, as well as deteriorating service delivery.

In Pakistan, the SOE reform process began in the late 1970s, with a focus on privatisation. However, the process remained inconsistent, with short spells of progress punctuated by long periods of stagnation. This was a result of various factors with the biggest hurdle being an overemphasis on change in SOE ownership rather than critical SOE reform components: good corporate governance, strengthening of competition, effective regulation, and political consensus and addressing labour concerns.

As a result, the country’s federal commercial SOEs continue to burden the government finances, with losses concentrated in two broad sectors i.e. power and infrastructure, transport & ITC.

In recognition of this, the government has recently initiated the first comprehensive set of legal and institutional measures for reforming SOEs’ corporate governance, and is in the process of taking SOEs’ ownership decisions, the Report mentioned.

SOEs around the world have been reformed significantly since the 1980s, alongside transformational shifts in their ecosystem and global experience demonstrates that SOEs’ ownership reforms, frequently done through privatisation, is not a panacea.

The success of SOE reforms, whether through privatisation or retention, mainly hinges on foundational reforms to the SOE ecosystem with a focus on strengthening of competition and deregulation; transparency and accountability; and a robust corporate governance framework, the Report pointed out.

However, SBP mentioned that Pakistan trails far behind other countries in the crucial pursuit of successful SOE reforms.

The reforms, in Pakistan have followed an intermittent path, with the process either rushed due to external push or frequently stalled due to lack of political consensus and as a result, it remains a work in progress.

At present, the SOEs in Pakistan pose a significant challenge, consistently posting net losses for the last eight years, requiring steady fiscal support from the government, it added.

“Between FY16 and FY23, the accumulative fiscal support, including subsidies, grants, loans, and equity injections, reached a whopping Rs 5.7 trillion, about an average of 1.4 per cent of GDP over this period,” the report revealed. Furthermore, contingent liabilities in the form of government guarantees are creating additional veiled risks to fiscal sustainability.

The untenable nature of this dependency as well as the deteriorating quality of goods and services of several SOEs makes their reform imperative for economic stability, it added.

Understandably, reforming SOEs is a long-drawn, complex and difficult process, including management of labour issues, such as redundancies, and implementation of hard budgets.

However, the daunting challenges that SOEs pose can potentially be a germinating point for garnering political consensus on home-grown push for SOE reforms, especially as potential rationalising of SOEs workforce may not be large given their relatively small share in total employment.

To this end, creating awareness, and open and transparent deliberations on policy options in parliament and media, can potentially allay public concerns and help remove the roadblocks to reforms. It is; however, essential that policymakers frame SOE reform within the broader context of ensuring well-functioning competitive markets, effective regulation and improvements to the institutional environment.

The report appreciated the steps taken by the present government and said that the recent government initiatives, namely the enactment of the SOE Governance and Ownership Act 2023 and SOE Ownership and Management Policy 2023, marks a notable shift from the government’s earlier approach to SOE reform efforts.

The establishment of a permanent Cabinet Committee on SOEs with clearly defined terms of reference; the formation of a Central Monitoring Unit for evaluating SOEs’ performance; the directives to conduct competitive sectorial assessments, ensuring competitive neutrality, mitigating the role of line ministry in micromanaging the SOEs; and adopting best practices for SOEs’ corporate governance, are some of the important steps in the right direction, it added.

However, the report said that the impact of these positive measures depends on the degree of commitment with which these are implemented.

Lastly, strengthening institutional arrangements to generate political consensus and wider public support alongside the preparation of a mitigation framework for managing prospective labour issues are paramount lest the absence of these may stall the SOE reform process again.

The headline of the article, originally published October 21, 2024, was updated on October 22, 2024 to reflect the fiscal support to SOEs over a period of eight years. The original version’s headline did not specify time period.

Copyright Business Recorder, 2024