Sunday January 23, 2022

44 SOEs to be privatised, liquidated

March 10, 2021

ISLAMABAD: The federal cabinet has approved the State-Owned Enterprises (SOEs) Bill 2021 proposing governance reforms in the management and oversight of cash bleeding public sector.

A detailed report titled “State-Owned Enterprises Triage: Reforms & Way Forward” stated that the government categorized SOEs into a different list of companies that would be kept part of the public sector while 44 companies would be privatised or liquidated in phases.

It states that for better management of the SOE portfolio, the Government of Pakistan has worked closely with IMF, ADB and World Bank to draft an SOE Bill which shall be shortly submitted to the parliament. The proposed law shall introduce structured governance reforms in the management and oversight of the SOEs. Through this proposed enactment, the boards of directors of the SOEs shall be given more autonomy in terms of decision-making in addition to ensuring the separation of the office of chairman from the CEO in all SOEs including entities established through special enactments. Moreover, the role of the line ministries/divisions shall be streamlined for operational autonomy of the SOEs.

The Government of Pakistan has started working on an SOE Ownership and Management Policy with technical support from ADB and IMF. So far, no policy framework exists in Pakistan which covers the entire SOEs portfolio. To address the current policy gap, and the diversity of sectors and legal and institutional frameworks in which the SOEs operate, the Government of Pakistan intends to develop a policy to manage these SOEs through a coherent and institutionalized arrangement. Finance Division has initiated steps for the establishment of a Central Monitoring Unit, which shall function as the central database and analytical unit for all the SOEs and shall report directly to the federal government. The unit shall be staffed with experts to be hired from the market and necessary resources for its working shall be provided. The CMU shall have access to necessary financial and nonfinancial information of each SOE and the business plans and target performance outcomes. The Unit shall prepare periodical performance evaluation reports of the SOEs and assist the federal government on matters of critical importance for better management of SOEs and their improved performance.

There are 14 entities which are planned to be retained under government ownership but require immediate reforms and possible restructuring. Among them Pakistan Railways and Pakistan International Airlines which were collectively making a loss of Rs88 billion in FY19, are already under active restructuring and reform process.

The Pakistan Railways (PR) is currently implementing a comprehensive restructuring plan which aims to enhance operational and financial efficiency to curtail losses and improve service delivery. The restructuring plan envisages to expand freight operations to cater excess freight demand and generate additional revenue, strengthen the office of GM/CEO of Pakistan Railways, rationalize the existing workforce and ensure work efficiency among its employees.

The Pakistan International Airlines has initiated a reform process by route rationalization and bringing efficiency in human resource management. The new management in PIA has paid a greater attention towards punctuality of flights and maintenance of aircraft that has resulted in increased revenue during the last fiscal year. New aircraft are also being added. However, Covid-19 has impacted PIA severely like every other airline. There are 10 SOEs which are on an active privatization list and are at various stages of the privatization process. Pakistan Steel Mills is an important entity on the active list and is at an advanced stage of the privatization process. The SME Bank is another loss making SOE which is on active privatization list. In addition to these, partial divestment of OGDCL and PPL is also underway.

24 SOEs are identified for the next batch of privatization, 12 of which were loss making in FY2018-19 with a combined loss of Rs156 billion. Among the loss making SOEs proposed for privatization, the major entities are eight DISCOs (HESCO, IESCO, PESCO, SEPCO, MEPCO, LESCO, FESCO and QESCO), one GENCO (Jamshoro Power Company) along with Pakistan Textile City Ltd., State Engineering Corporation and Telephone Industries of Pakistan.

Ten SOEs have been identified as potential privatization candidates and due consultations with line ministries have already been initiated. In FY2018-19, six entities were loss making with a combined loss of Rs38.5 billion mainly emanating from ZTBL (Rs18 billion), SSGC (Rs14.8 billion) and USC (Rs5 billion). The Industrial Development Bank of Pakistan is already under the process of liquidation. Steps shall be taken for early completion of the liquidation process.

Currently, there are around 212 SOEs operating in various sectors of Pakistan with the following breakdown: 85 commercial SOEs, 44 Non-commercial SOEs and 83 subsidiaries of the commercial SOEs. The 85 commercial SOEs, to which this exercise is focused, mainly operate in seven sectors: power; oil and gas; infrastructure, transport and communication; manufacturing, mining and engineering; finance; industrial estate development and management and wholesale, retail and marketing.

The SOEs in Pakistan have significant market presence particularly in key service sectors like power generation and distribution, energy, aviation, and railways sectors. The overall revenues of all the SOEs in 2018-19 was Rs4 trillion (approx.) while the book value of their assets was Rs19 trillion. The revenues in 2018-19 were roughly 10pc of nominal GDP. Additionally, SOEs provided employment to more than 450,000 people which constitutes around 0.8pc of the total workforce. Despite their important role in providing essential public goods and services, the financial performance of several SOEs has remained unsatisfactory. In FY2018-19, the commercial SOEs collectively recorded net losses of Rs143 billion, which was significantly lower than net losses (Rs287 billion) incurred by the SOEs in FY2017-18. The improvement in SOEs' performance was driven by the Government of Pakistan’s policies. The concern that the financial performance of SOEs portfolio has declined over time is evident from the fact that in 2013-14, the year for which the consolidated data of SOEs is available, the SOEs recorded an overall net profit of Rs204 billion which fell to Rs61 billion in the following year and declined further to record an aggregate loss. Since FY2015-16, SOEs have consistently incurred significant losses creating a heavy burden on the GOP’s fiscal positions.

Further breaking down the performance of SOEs reveals that over the past six years, one-third of the commercial SOEs have experienced losses intermittently. Moreover, the sum of the losses of top 10 loss-making SOEs contributes around 90pc to the total losses of SOEs' portfolio each year. NHA, Pakistan Railways, PIA and power sector DISCOs have been among the major, top 10 loss-makings SOEs.