FeaturedNationalVOLUME 18 ISSUE # 24

A new reform plan for loss making state enterprises

Better late than never, the government has now developed a new policy to not set up any new state owned enterprises in future and gradually offload a majority of existing 200 entities running in losses. With over Rs500 billion in financial bleeding by SOEs annually, the decision has not come too soon. For decades, the government has been losing billions of rupees through unviable state owned entities which have become a big burden on the national economy.

According to the World Bank, Pakistan’s state-owned entities (SOEs) are the worst performing in South Asia and their combined losses, growing faster than their assets, are an unbearable drain on scarce public resources. It is estimated that on an annual basis, they eat up more than Rs458bn in public funds, and their combined loans and sovereign guarantees totaled almost 10pc of GDP (Rs5.4tr) in FY21. As per the WB report, these entities had been incurring losses since FY16, with annual losses averaging at 0.5pc of GDP over FY16–20. At last count, the accumulated SOE losses amounted to 3.1pc of GDP in FY20.

To cover the losses, the federal government has been providing direct fiscal support to the SOEs, in the form of subsidies, loans and equity injections, which totaled 1.4pc of GDP in FY21. In addition to direct support, the government has also been issuing guarantees for SOEs to secure loans from commercial banks. The federal government’s exposure to SOEs, defined as the outstanding stock of guarantees and government loans to SOEs, has been rapidly increasing and stood at 9.7pc of GDP in FY21.

SBP figures show that the stock of outstanding government guarantees to SOEs has more than doubled since FY16. There are many reasons for the continuing losses, including complex corporate governance issues, sector regulations, an underestimation of the cost of restructuring and insufficient subsidies. SOE losses are mainly concentrated in the power, infrastructure, and transport sectors.

The ever escalating financial losses by SOEs have been a headache for each succeeding government. Under the new policy, the government has decided not to set up any new state-owned entity (SOE) in future unless required for strategic reasons. In terms of the draft policy, strategic SOEs are defined as those organisations which serve a strategic purpose or own and manage strategic assets. The strategic entities also include monopoly service providers and there is no effective economic regulatory oversight of their operations.

The new policy lays down that the only exception where the federal government could consider establishing a new SOE would be that there is no private sector firm operating within the relevant sector providing the goods and/or services that the new SOE will provide and that the government wants to establish a particular market in any sector of the economy which will be supported by the creation of an SOE, provided that such SOE shall under no circumstances be given exclusivity in provision of services or goods and shall strictly adhere to the principle of competitive neutrality.

An important policy provision is that if a new SOE has to be formed through the corporatisation of an existing government function, it will be clearly categorised as either commercial or non-commercial and should be created if required under the law or its services could not be procured through any private sector firm due to legal restrictions. SOEs may be set up as agreed by the federal government in any government-to-government agreement with other countries provided that in future, while entering into any such agreement which requires the federal government to establish an SOE, the government shall attempt to comply with the principles set out in this policy as far as possible.

To deal with the problem of existing SOEs, the government has decided to put in place a mechanism for their restructuring leading to gradual privatisation or divestment as a private-public partnership (PPP). To this end, various government departments will develop a reform plan under which the SOEs will be categorized as strategic, commercial SOEs to be privatised, SOEs required to be restructured and retained for a specific period of time.

The reform plan, among other things, will cover such issues as listing of SOEs, restructuring and mergers, conversion into PPPs, contracting out operations and asset sales along with transformation options and timelines to implement the process. Under the reform plan, the relevant division or ministry would submit its recommendations for each SOE to the cabinet committee within six months of the coming into effect of the new policy. In case of SOEs facing financial or operational problems, the federal government will develop a transformation plan for financial and operational improvement.

It will be the responsibility of the cabinet committee on SOEs to oversee and monitor all processes relating to the reform plan. How well it is done remains to be seen. Our bureaucracy is notorious for drawing up elaborate plans and policies but never implementing them in letter and spirit. Let us hope that the reform plan for SEOs sees a better fate.