The IMF Seeks A New Legislation On Management of State Enterprises

ISLAMABAD: The IMF has tied the continuation of its current programme to “parliamentary ratification” of the new state-owned enterprises (SOE) law by the end of June in order to ensure transparent management of the state corporations, citing the over 8% of GDP — or approximately Rs5 trillion — contingent liabilities of SOEs as a key fiscal risk.

As the IMF pointed out in a recent assessment on Pakistan’s economy, “Contingent debts from loss-making SOEs — to the degree not covered by government warranties” continues to offer further risks to debt sustainability.

“The remaining contingent liabilities from circular debt (amounting to less than 0.8 percent of GDP) as well as “contingent liabilities from other loss-making SOEs (assumed to be in the range of 5-6 percent of GDP) and/or from the financial sector” are taken into account by “a stress test to debt dynamics consisting of a contingent liability shock,” according to the statement.

It is possible for an entity to incur contingent liabilities in the case of an unknown future event, such as the outcome of litigation. Due to the lack of information on the balance sheet, contingent liabilities are not included.

Inadequate performance and poor corporate governance in Pakistan’s SOE sector, according to the IMF, pose considerable fiscal concerns. In 2019, non-financial commercial SOEs had assets totalling 44 percent of GDP (up from 31 percent in 2015), but only employed 0.7 percent of the workforce.

There are 213 SOEs at the federal level, but only 85 of them have commercial activities, according to a detailed triage report released by the Ministry of Finance in 2021 (18 financial and 67 non-financial).

In FY2019, non-financial commercial SOE revenues totalled almost Rs5tr or 14 percent of GDP. Many SOEs’ financial performances is bad, with one-third of them routinely incurring losses, according to the report, which noted that better governance and a reduced state presence were necessary to improve SOE sector efficiency.

This year, the International Monetary Fund (IMF) has requested that the government expedite the legal, regulatory, and policy framework updating of the SOE sector in order to secure “the legislative ratification of the SOE statute in accordance with IMF recommendations” by the end of June.

It follows from this that, as with the recently passed State Bank of Pakistan law, parliament must ratify the SOE law by all means necessary in order to establish the reason for state ownership, assure commercially sound SOE operations, and establish regulations for monitoring and ownership.

A new ownership policy, changes to numerous SOEs’ Acts, and the creation of a central monitoring agency inside the Ministry of Finance are among the further actions that must be taken. Additionally, the IMF has requested that the state’s economic footprint be gradually reduced, with just a small number of SOEs considered strategic in state control, in order to improve efficiency and lower fiscal risks.

As part of this process, two LNG-based power plants and two minor public banks will be sold off. Key SOEs, like the Utility Stores Corporation, must be audited on a regular and timely basis by the International Monetary Fund.

This has led to a commitment from the administration that by the end of May, a central monitoring unit inside the finance ministry will be operationally operationalized. As a result, the SOE monitoring functions will be more centrally located, allowing for more comprehensive SOE analysis.

The selection and submission by the parliament of amendments to the acts of four state-owned enterprises (SOEs), has been made in order to ensure that their scope is consistent with the principles of SOE law. Also, the adoption by the cabinet of an SOE ownership policy to help operationalize SOE law principles into a policy that clarifies ownership arrangements and roles within the federal government will be very effective.

There are plans to privatise two LNG-fueled power plants and two minor public banks, which the government promised the IMF it would complete by the end of June. Proceeds will go toward debt reduction and anti-poverty initiatives.

In order to finish the privatisation process by the end of the year, the government plans to complete the outstanding annual audits of the other bank for 2018-20 by the end of June and the 2021 annual audit by the end of August.

At least one-third of the commercial SOEs, including Pakistan Railways, the National Highway Authority, power distribution companies (or Discos), and Pakistan International Airlines, which operates the Roosevelt Hotel in New York and the Scribe Hotel in Paris, reported losses in 2019, according to the International Monetary Fund (IMF).

In the fiscal year 2019, commercial SOEs lost Rs143 billion. According to a World Bank 2021 report, Pakistan’s loss-making state-owned enterprises (SOEs) have liabilities of between 14 and 18 percent of GDP, which might result in significant fiscal burdens.

Regulation of state-owned enterprises (SOEs) would be separated from policymaking under a new bill already tabled in parliament. As a result, SOEs will be required by law to publicly explain their company’s goals and objectives.

In the future, an ownership policy document will be created to incorporate this framework and to specify the steps involved in formulating strategy and negotiating performance agreements, as well as the responsibilities of each institution.

As a result of the proposed changes, the board’s oversight of SOE operations is likely to be bolstered, resulting in a tightening of both the internal and external controls and reporting and disclosure standards.

With regard to conformity with worldwide financial and accounting rule standards and disclosure of non-financial information, a deadline of at least annually is set forth in the new legislation.

It is intended that each SOE’s board would establish a three-year business plan every fiscal year, including goals, strategic direction as well as performance indicators for operational and financial purposes.

The new statute mandates that the government and the SOE sign a performance agreement based on this business plan. On an annual and quarterly basis, such businesses’ performance would be evaluated, supported by timely audited yearly financial statements that meet the highest international standards.