Tuesday September 21, 2021

Govt upbeat about law to turn SOEs to profit-making entities

September 16, 2020

ISLAMABAD: Keeping in view Pakistan's endeavors to meet one of the IMF benchmarks for Extended Fund Facility programme, the government is upbeat on making a law to turn all state-owned enterprises (SOEs) into profit making institutions.

And to this effect, the federal cabinet has ratified the decisions taken by its committee on SOEs, directing the Finance Division to carry out the forensic audits of the loss-making entities. The finance ministry would obtain information from Auditor General of Pakistan (AGP) about the availability of expert auditors to carry out forensic audit of major loss-making SOEs in pursuance of PM's directives. Reports said the ministry would manage information from audit firms regarding estimated cost of the forensic audit and time during which the forensic audit would be completed. It would also consult the relevant ministries and divisions to select major loss-making SOEs under their control, saying the audit would not be confined to a particular sector.

According to a top official of the Finance Division, one of the benchmarks under the IMF’s Extended Fund Facility (EFF) programme was to frame a law to reform the governing mechanism of SOEs. And in this connection, a detailed diagnostic study had already been carried out by the technical mission of IMF, which identified the key governance issues in the management of SOEs in Pakistan. "A legal drafting team was engaged with the technical support of ADB." Moreover, the official said that due consultations were made with the SECP, Privatization Commission, ADB, World Bank and IMF along with independent experts of the task force that was constituted for this purpose. This draft SOE law namely State Owned Enterprises (Governance and Operations) Act, 2020 has been prepared that covers: a) Prudent and efficient management according to which commercial SOE must be commercially successful and non-commercial SOE must be efficient (b) Measurable performance according to which a state-owned enterprise must identify its business goals (c)

Responsible management according to which the management of a state-owned enterprise must be competent, honest and accountable (d) Transparent performance must be ensured. Under the proposed law, a state-owned enterprise would have to report its performance fully, transparently and timely. The draft law would also provide selection criteria for a director and encompasses the corporate governance mechanism framework.

It has been approved in principle that in the proposed law, the commercial state owned enterprises shall maintain independent procurement policies with approval of the federal cabinet, which comply with Chartered Institute of Procurement and shall only be responsible for compliance of provisions of PPRA Ordinance, 2002 to such extent as may be directed by the federal government. "The committee also discussed the exemption criteria of the SOEs from the PPRA rules."

The official, while referring to the observations of Dr Ishrat Hussain, Adviser to the PM on Institutions Reforms and Austerity, said the performance of the SOEs was not being evaluated by the concerned ministries and divisions. He said a committee, comprising professional experts based in the finance division, should also be constituted to monitor the performance of these entities on the basis of 80:20 rule.

The adviser said the committee should also review the performance of at least 20 percent of SOEs. He said the role of the ministries and divisions is very limited, while there is a need to look into the macro picture of the loss-making SOEs, once in a year. He also observed that there are three main functions, which are regulation, operation and policy making as the operation with the company and policy making is with the government. He further observed that the consistency of the proposed law with other relevant legislature needs to be ensured while vetting by the Law and Justice Division.

The official said the prime minister had desired and directed his adviser on finance and revenue to get forensic audit of the major loss making SOEs that had not been conducted for the last 10 years. According to the available data on loss-making SOEs from FY14 to FY18, the top 15 loss-making entities consistently contributed to more than 90 percent of the overall loss of SOEs. He said that in order to proceed the matter, some important issues needed to be addressed as i) to identify the SOEs to be audited, ii) to decide if forensic audit be undertaken by Auditor General of Pakistan or by reputed firms of chartered accountants; iii) to decide if forensic audit may be undertaken for 10 years for all loss-making entities or not and iv) and to fix the time lines of the forensic audit.