Major structural reforms implementation: Pakistan, ADB sign $300 million loan agreement

ISLAMABAD: The Asian Development Bank (ADB) and Pakistan on Thursday signed a $300 million loan to support public sector enterprises (PSEs).

Under the agreement, Islamabad has accepted conditions to absorb funding cost for retirement of employees of eight power distribution companies.

The ADB and Pakistan signed a $300 million loan to support Pakistan’s efforts to implement major structural reforms and efficiency initiatives to improve the performance, transparency, and financial sustainability of the country’s federal government-run public sector enterprises (PSEs).

Under the first subprogram, Pakistan has designed the critical communication strategy and policies to address important issues pertaining to workers’ voluntary separation scheme, pensions, and training.  Under the second subprogram, the government will implement the strategy and policies.

“One critical component is to design and initiate funding of the retirement cost fund of eight power distribution companies”. These companies included Faisalabad Electric Supply Company Limited (FESCO), Gujranwala Electric Power Company Limited, (GEPCO), Hyderabad Electric Supply Company Limited (HESCO), Islamabad Electric Supply Company Limited (IESCO), Lahore Electric Supply Company Limited (LESCO), Multan Electric Power Company Limited (MEPCO), Peshawar Electric Supply Company Limited (PESCO), and Sukkur Electric Supply Company Limited (SEPCO).

These companies had already set up the retirement cost fund with appropriate governance structure and the investment policies.

The government has earmarked Rs15 billion in the federal budget for 2017/18 to operationalise these funds. This will facilitate to make this critical reform effective.

Under the agreement, the government will also operationalise an information technology-based performance monitoring system of PSEs.

Finances of PSEs in Pakistan remain weak despite recent reform initiatives. The 183 PSEs owned by the government comprise 169 companies, seven development finance institutions, and seven federal authorities, employing more than 402,543 workers with the total assets of Rs10,823 billion ($108 billion) in the fiscal year FY 2015.

In that year, 172 PSE’s (94 percent) disclosed financial statements, of which 53 PSEs, or 31 percent reported losses despite significant budget transfers. 

Despite recent reform initiatives, PSEs continue to rely on significant regular fiscal transfers and sovereign credit guarantees to maintain their operations.

Pakistan International Airlines, Pakistan Steel Mills, the power distribution companies, and Pakistan Railways are major recipients of such transfers.

In FY2016, fiscal allocation to support day-to-day PSEs operations, including subsidies and other transfers, it constituted 65 percent of the overall budget allocations to the PSEs, severely limiting critical capital development expenditures to improve PSE efficiency.

The government has agreed with the ADB on certain covenants for subprogram II, which are set forth in the loan agreements.

The government will ensure that for FY2017 and each subsequent fiscal year for the duration of the programmatic approach, the amount of the budget allocation to PSEs for their development expenditures, including development loans, will at least be 0.4 percent of Pakistan’s GDP for the same fiscal year.

Xiaohong Yang, ADB’s country director for Pakistan, and Tariq Mahmood Pasha, secretary economic affairs division (EAD) for the government of Pakistan, signed the loan agreement. 

“Pakistan’s state-owned enterprises provide vital services to the people of Pakistan and to the country’s economy,” Yang said.

“The ADB is proud to support the government of Pakistan’s commitment to implement reforms that will ensure financial sustainability of these firms, while improving efficiency and cost-effectiveness,” he added.

The financial performance of many federal government PSEs in Pakistan — which employ more than 400,000 people have been weak in recent years, despite significant budget support from the federal government.

The programme will support government’s efforts to improve the performance of the PSEs by improving corporate governance and accountability, identifying and reducing financial burdens arising out of direct budgetary transfers to PSEs.

This will strengthen the fiscal sustainability and freeing of finances for priority development projects. The ADB’s assistance is the second subprogram under the PSEs Reform Program, bringing the total ADB financing for critical reforms in PSEs to $600 million since June 2016.

With the ADB’s assistance, under the Public Sector Enterprises Reform Program, the government of Pakistan has carried out significant structural reforms and efficiency initiatives to help improve financial sustainability and operational efficiency of PSEs, and helped improve the compliance to the Corporate Governance Rules 2013.

Many policy actions have been introduced under the programme to improve the financial transparency, monitoring, and corporate governance in PSEs. 

A critical target under the programme’s second subprogram is to increase the compliance rate of companies to Corporate Governance Rules to 50 percent. The restructuring and reform of selected public sector enterprises, particularly Pakistan Railways, have also been initiated.

Under the programme, the government has started publishing the financial performance report of all federal PSEs, which will be available on its website.