ISLAMABAD: Contingent liabilities of state-owned enterprises (SOEs) amount to about eight per cent of GDP – or about Rs. ongoing program With “parliamentary approval” of the new SOE law by the end of June to ensure transparent management of these companies.
The IMF noted in a special chapter in a recent report on Pakistan’s economy, “Contingent liabilities from loss-making SoEs – to the extent not covered by government guarantees – continue to represent additional risks to debt stability.” “
It said the authorities recognized around 1 pc of GDP contingent liabilities in circular loans, but the remaining contingent liabilities were recognized as circular debt (amounting to less than 0.8 pc of GDP) as well as “other loss-making Contingent liabilities from SOEs (assumed to be in the range of 5-6 per cent of GDP) and/or credit dynamics from the financial sector are accounted for by a stress test that includes a contingent liability shock”.
Contingent liabilities are liabilities that may be incurred by an entity based on the outcome of an uncertain future event, such as the result of a lawsuit. Contingent liabilities are not shown in the balance sheet but adequate disclosure should be given.
The IMF report said that Pakistan’s SOE sector is troubled by poor performance and weak corporate governance, posing significant financial risks. Non-financial commercial SOEs accounted for 44 percent of GDP in 2019 (up from 31 percent in 2015) but provided only 0.7 percent of total employment.
Based on a comprehensive triage report published by the Ministry of Finance in 2021, which provides a snapshot of the federal level SOE landscape as of the end of fiscal 2019, there are 213 SOEs, of which only 85 are commercial operations (18 financial and 67 non-commercial). -financial).
The total revenue of all non-financial commercial SOEs in FY2019 was around 5tr or 14pc of GDP. “Despite their important role in the economy, the financial performance of many SoEs is weak, with a third consistently generating losses”, it said, adding that both strong governance and a small state footprint were key to increasing efficiency in the SoEs. Area.
The IMF has asked the government to expedite the updating of the legal, regulatory and policy framework of the SoE sector, for which it has established a structural benchmark by the end of June to ensure “Parliamentary approval of the SoE legislation in line with the recommendations of the IMF”. has done. The year.
This means that Parliament will have to approve the SOE law by all means, as in the case of the recent State Bank of Pakistan law, defining an argument for state ownership, to ensure commercially sound SOE operations. To administer and regulate the oversight and ownership arrangements.
Additional steps include defining a new ownership policy, amending several SOE Acts and operating a central monitoring unit within the finance ministry. To further boost efficiency and reduce fiscal risks, the IMF has also asked for a gradual reduction in the state’s footprint in the economy to be followed, with only a few SoEs considered strategic under state ownership.
This includes finalizing the disinvestment of two LNG-based power plants and two small public sector banks. The IMF “emphasized that regular and timely audits of major SOEs, including Utility Stores Corporation, remain important”.
As a result, the government has committed to operationalize a central monitoring unit within the finance ministry by the end of May. The unit will centralize the SOE monitoring functions and provide better analysis at the overall SOE level.
The government has also committed to the IMF to try to finalize some additional work by the end of May, including the adoption of the cabinet’s SOE ownership policy to help steer the SOE law principles into a policy that controls ownership. Explains the arrangement and division of roles. Selecting four more SOEs within the federal government and submitting amendments to their acts in Parliament to ensure that the scope of the SOE law brings about regime change in statutory enterprises.
In this regard, the government has told the IMF that it has to complete the process by the end of June to privatize two power plants using regasified LNG and two smaller public banks and proceeds to finance debt reduction and poverty programs. advanced plan.
Also, the government will complete the outstanding annual audit of the second bank for 2018-20 by the end of June and the annual audit of 2021 by the end of August, with the aim of completing the process of privatization by the end of this year.
The IMF noted that in 2019, nearly half of SOEs were loss-making, including a third of commercial SOEs that continue to generate losses; Prominent among them were the National Highways Authority, power sector distribution companies (or DISCOs), Pakistan Railways and Pakistan International Airlines, which owns the Roosevelt Hotel in New York and the Scrib Hotel in Paris.
Commercial SOEs reported a loss of Rs 143bn in the 2019 financial year. A recent work published by the World Bank in 2021 has estimated that Pakistan’s loss-making SOEs have liabilities in the range of 14-18 per cent of GDP, with potential financial costs.
The new proposed law, already introduced in Parliament, intends to separate regulatory and policy-making functions with respect to the state’s SOEs. This would require the SOE to determine the company’s mandate and strategies through a publicly available statement of corporate intent.
A proprietary policy document will subsequently integrate this framework and clarify the procedures for developing strategy and performance agreements as well as the respective roles of all involved institutions.
The reforms in the proposed Act are also expected to strengthen the central role of the Board in overseeing SOE operations, hence strengthening reporting and disclosure standards, along with internal and external controls.
In this regard, the new Act provides a timeline for compliance with international financial and account rule standards and for disclosure of non-financial information and overall reporting on a minimum annual basis.
Under the new Act, the board of each SOE will be expected to adopt a three-year business plan every financial year setting out goals, strategic direction and operational and financial performance measures.
This business plan mandated by the new Act is envisaged as a performance agreement between the government and the SOE. The performance of such entities will be assessed on an annual and quarterly basis, backed by timely audited annual financial statements adhering to the best international standards.
Published at dawn, February 14, 2022