State enterprise and privatisation

The Privatisation Commission Ordinance 2000 and the relevant rules need to be amended

State enterprise and privatisation


March 3, 2021, report, State-Owned Enterprises Triage: Reforms and Way Forward, released by the Finance Division of the Ministry of Finance, has revealed that 212 state-owned enterprises (SOEs) are operating in the country. These include 85 commercial, 44 non-commercial (established under Section 42 of the Companies Act, 2017) companies, non-profit organisations (NPOs), trusts, universities etc, and 83 subsidiaries of the commercial SOEs.

The 85 commercial SOEs operate in the following sectors: power, oil and gas, infrastructure, transport and communication, manufacturing, mining, engineering, finance, industrial estate development and management; as well as wholesale, retail and marketing.

These SOEs have significant market presence, particularly in key service sectors like power generation and distribution, energy, aviation and railways. In fiscal year (FY) 2018-19 estimated revenue of the SOEs was approximately Rs 4 trillion and the book value of their assets Rs 19 trillion.

During FY 2018-19, the revenue was roughly 10 percent of nominal gross domestic product (GDP). Additionally, the SOEs employed more than 450,000 people which constitutes around 0.8 percent of the workforce. In FY 2018-19, the commercial SOEs recorded net losses of Rs 143 billion, which was significantly lower than the net amount of losses of Rs 287 billion incurred in FY 2017-18.

The power sector has the largest number of commercial SOEs with 21 entities. It also has the largest share of assets in the SOE portfolio, amounting to over Rs 7.8 trillion in FY 2019. These companies range from power generation to distribution, transmission, management and trading. Financial sector SOEs are next on the list, having 18 entities with the third largest share of the assets.

Commercial SOEs employ 415,670 workers, including officers and executives. The distribution companies continue to lead in employment with 114,253 personnel. 71.5 percent of all employees are non-management staff and 15.8 percent are officers. Less than 3 percent of the employees are executives; 3.9 percent are daily wage earners.

Over the past six years, a third of the commercial SOEs have run intermittent losses. The top ten loss-making SOEs contribute around 90 percent of the losses.

National Highway Authority (NHA), Pakistan Railways, Pakistan International Airlines (PIA), and power distribution companies (DISCOs) are among the top ten loss-making SOEs. Despite knowing the potential of these entities, the authorities have been unwilling to reform or liquidate these to improve the country’s fiscal discipline.

The power sector has the largest number of commercial SOEs with 21 entities. It also has the largest share of assets in the SOE portfolio, amounting to over Rs 7.8 trillion in FY 2019. These companies range from power generation to distribution, transmission, management and trading.

Pakistan signed a $6 billion Extended Finance Facility (EFF) agreement with the International Monetary Fund (IMF) in 2019. Apart from other conditions, the IMF asked the government to improve the SOEs’ governance through a regulatory framework to generate higher and sustainable growth. The IMF, in its country staff report issued on February 4, 2022, expressed concern that the SOE sector was saddled by poor performance and weak corporate governance, posing significant fiscal risks. The global lender emphasised that the government should ensure both stronger governance and a smaller footprint in the SOEs. The report stressed finalisation of the divestment of two LNG-based power plants and two small public banks, including approval of the SOE law in accordance with the IMF suggestions.

To meet this demand, in January 2023 the parliament approved the long-awaited State-Owned Enterprises (Governance and Operations) Act, 2023, that was to be passed in the early stage of the IMF programme in 2019. Despite a four-year delay, the Act’s language is too generic to meet IMF’s requirement, what to talk of bringing any improvement in governance and operations of the SOEs.

Most of the requirements to improve the efficiency of the SOEs, framing policies and procedures mentioned in the Act are already part of the Companies Act of 2017 and corporate governance regulations. Chapter 3 of the Act discusses Prudent and Efficient Management. This seems to be too generic and confusing.

Most of the terms mentioned in the law are not defined. It may be mentioned that the objective of state-owned enterprises is to operate in an efficient manner, achieving their defined goals with the guarantee to generate sufficient revenues to cover their costs and be financially sustainable. However, nothing in the policy and the law provides a comprehensive way forward. On the contrary, they are heavily dependent on the federal and provincial governments for their finances and operations.

The bureaucratic running of commercial SOEs will get us nothing but the losses, inefficiency and corruption. The government should ensure professional administration, rather than writing generic terms of “sound” and “prudent management” for the SOEs. The recruitment policy for executives in commercial SOEs must specify that they have over 20 years of relevant experience. Bureaucrat, judges or generals should not be appointed as CEO or heads of departments.

The way forward is to re-evaluate and amend the Privatisation Commission Ordinance 2000 and relevant rules to relax the pre- and post-privatisation conditions for expediting the process of offloading the sick SOEs. We need to accelerate the process of privatisation as recommended by the IMF and the SOE Triage Report 2021, for other than the strategic industries. This will ultimately help save our otherwise scarce resources that can be efficiently utilised to give a better life to the less privileged segments of the society.

Abdul Rauf Shakoori is a corporate lawyer based in the USA

Dr Ikramul Haq, an advocate of Supreme Court, is adjunct faculty at Lahore University of Management Sciences (LUMS)

State enterprise and privatisation