ISLAMABAD: With over Rs500 billion in annual financial bleeding, the government has decided not to set up any new state-owed entity (SOE) in future unless required for strategic reasons or under an agreement with any country and gradually off-load the majority of an existing lot of 200 entities mostly operating in losses.

This is part of the draft SOE Policy released by the Ministry of Finance under the requirement of the IMF programme and SOE’s Governance and Operations Act 2023. “The Federal Government shall own or retain only those SOEs that are determined to be strategic as approved under SOE Triage”, reads the policy and defines strategic SOEs which have significant strategic, security, or social importance that they cannot be entrusted to only private ownership.

“Strategic SOEs can be defined as those SOEs undertaking a strategic objective or owning and managing strategic assets”, says the draft policy.

Unveils draft policy to restructure and reduce existing SOEs

The strategic entities also include monopoly service providers and there is no effective economic regulatory oversight of their operations. However, in such cases, the federal government may explore transformation options such as outsourcing and management transfer options with sufficient safeguards embedded. The government has sought public comments on the draft policy within 15 days before its implementation.

Conditions for new setups

The only exemption where the federal government could consider establishing a new SOE would be that there is no private sector firm operating within the relevant sector providing the goods and/or services that the new SOE will provide and that the government wants to establish a particular market in any sector of the economy which will be supported by the creation of an SOE, provided that such SOE shall under no circumstances be given exclusivity in provision of services or goods and shall strictly adhere to the principle of competitive neutrality.

In case a new SOE has been formed through the corporatisation of an existing government function, the new SOE will be clearly categorised as either commercial or non-commercial and should be created if required under the law or its services could not be procured through any private sector firm due to a legal restriction. The exemption for new entities would also be there if SOE is required under any government-to-government agreement with another sovereign nation.

For the avoidance of doubt, SOEs may be set up as agreed by the federal government in any government-to-government agreement with other countries provided that in future, while entering into any such agreement which requires the federal government to establish an SOE, the government shall attempt to comply with the principles set out in this policy as far as possible.

For existing SOEs, the government would put in place a mechanism for their restructuring leading to gradual privatisation or divestment as a private-public partnership (PPP). For this, each division of the federal government which has SOEs operating within its administrative control under the Rules of Business, 1973, shall develop a reform plan under their oversight and categorise the SOEs into strategic SOEs, commercial SOEs to be privatised, SOEs required to be restructured and reformed and retained in the medium term or SOEs required to be restructured before privatisation.

Proposals for reforms

The reform plan would include proposals for reforms of SOEs such as a listing of SOEs, restructuring and mergers, entering into PPPs, contracting out operations and asset sales along with transformation options and timelines to implement the process. The relevant division or ministry would be required to submit its recommendations for each such SOE to the cabinet committee on SOEs within six months of the coming into effect of the new policy.

For non-strategic SOEs, line ministries and divisions will develop a plan to transform these SOEs through different options including corporate restructuring, management contracts, joint ventures, PPPs, and outsourcing. In case of an SOE is facing financial or operational problems, the federal government shall require the relevant ministry, in consultation with the central monitory unit, to develop a transformation plan for financial and operational improvement of the SOE.

Performance benchmark

If an SOE is unable to perform satisfactorily financially and operationally after repeated efforts to improve performance, the federal government shall declare it a sick company in terms of section 292 of the Companies Act, 2017 and any institution, authority, committee, or person may be authorized to draw up a plan for the rehabilitation, reconstruction, and reorganization of such SOE. The Privatization Commission would then be allowed to determine the next steps for these SOEs while taking measures to protect the strategic interest of the government during the transformation process.

Under the policy, the government would ensure the establishment of a CMU in the Finance Division, whose primary responsibility would be to monitor the operations and performance of SOEs. The cabinet committee on SOEs would be responsible for the above process along with all matters related to appointment of board of directors, reform and restructuring process, period performance and financial review and all related matters.

The relevant ministries and divisions would be required to coordinate with the board of such SOE to ensure compliance with the provisions of the new policy and the act, including, the development of the business plan, Statement of Corporate Intent (SCI), the annual and bi-annual reports, the timely establishment of systems of internal controls of the SOE, and reporting to the CMU.

Published in Dawn, April 21st, 2023