• Their reform is part of the original agreement with the IMF
• The bill does not involve buyback options

Pakistan plans to sell shares of listed state-owned entities (SOEs) to some Middle Eastern countries on a government-to-government (G2G) basis to bridge a $4 billion financing gap for the current fiscal year over and above about $36bn financial plan estimated by the International Monetary Fund (IMF).

To facilitate such transactions, the government has introduced in the national assembly a new piece of legislation — the Intergovernmental Commercial Transactions Act, 2022 — to provide “for a mechanism to carry out a commercial transaction under an inter-governmental framework agreement to promote, attract and encourage foreign states to have economic and business relations with Pakistan”.

Finance Minister Miftah Ismail says the proposed transactions — initially of LNG-based power plants and minority shares of listed SOEs — would involve buyback options for the government but the bill introduced in the assembly does not explicitly provide for such a possibility unless changes are made later.

He may have a point here but the larger question on the subject has been the politicisation of economic and commercial decision-making. The manifestoes of almost all the mainstream parties advocate divestment of government stakes in SOEs to cut losses and reduce the government footprint in business yet none have been able to do so.

This is despite the fact that these SOE cost losses to the state of over 4.5pc of GDP, according to 2018-19 estimates, including almost 2pc of GDP on account of only three entities — PIA, PSM and Railways. Another 2pc of GDP worth of guarantees are provided by the government to keep them floating.

On the downside, the stock exchange is at its lowest ebb and share prices are at rock bottom while on the positive side, the involvement of foreign shareholding could improve governance structure and transparency in the operations of such SOEs and provide non-debt foreign inflows as well to the government. Because of repeated recourse to bilateral loans, there is apparent fatigue even among friendly lenders.

As things stand, there is no legislation for negotiating inter-governmental agreements. Under the proposed law, the federal government will constitute a Cabinet Committee on Intergovernmental Commercial Transactions and its primary function will be to enter into inter-governmental agreements to allow SOEs of both countries to carry out a commercial venture either in Pakistan or in a foreign country.

The inefficient SOEs have been a key target of the IMF programme since its inception in July 2019, hence improving the SOEs by modernising the legal framework is one of the central objectives. In fact, seven transactions with good sale prospects were part of the IMF’s original agreement. These included two LNG-based power plants (Balloki and Haveli Bahadurshah), two smaller banks (SME and First Women Bank), two real estate projects (Jinnah Convention centre and Services Hotel Lahore) and 19 per cent stakes in Mari Petroleum. None could materialise except the hotel in Lahore.

Furthermore, two structural benchmarks for the end of December 2019 and the end of September 2020 for the creation of the triage of SOE — sale, liquidation or restructuring — and improvement in the laws for governance and transparency — were part of the IMF quarterly review and failed.

Finally, the previous government could finalise by March 2021 a triage of 85 out of a total of 212 public sector companies for their ultimate privatisation, liquidation or retention in the public sector. The overall revenues of all these 85 SOEs in 2018-19 amounted to about Rs4 trillion while the book value of their assets stood at Rs19tr and yet caused about Rs287bn losses in 2017-18.

It was concluded that a total of 25 SOEs, which together earned Rs107bn in 2018-19 would be retained in the public sector while another 14 will be retained for restructuring. Ten other companies were already under the privatisation programme and yet another 24 companies were targeted for sale in the next phase between 2023 and 2024.

The Asian Development Bank and the IMF had been engaged all along till the finalisation of a new bill that seeks to override more than six major laws dealing with the country’s corporate, privatisation, procurement and securities laws.

Some of them specifically include the Companies Act, 2017, Privatisation Commission Ordinance, 2000, the Public Procurement Regulatory Authority Ordinance, 2002, Public-Private Partnership Authority Act, 2017, Securities and Exchange Commission of Pakistan Act, 1997, Securities Act, 2015 and other relevant laws.

The Asian Development Bank and the IMF had been engaged all along till the finalisation of a new bill that seeks to override more than six major laws dealing with corporate, privatisation, procurement and securities.

In a peculiar move, the law bars all courts from entertaining any application against any process undertaken for the G2G transaction and provides complete indemnity from any legal proceedings, procedural lapses or omission in the exercise or performance of any functions unless the act is shown, beyond a reasonable doubt to have been in bad faith.

Moreover, no agency or court will proceed against any procedural lapse or irregularity by any person in a commercial transaction or agreement unless there exists evidence of personal monetary gain with corroborative evidence of a link between such monetary gain to the undue benefit rendered to any party of the agreement.

Also, no person can be sued in his personal capacity for action taken in his official capacity and any procedural irregularity or lapse shall not affect, vitiate, set aside, annul or rescind a commercial transaction or a commercial agreement.

Published in Dawn, The Business and Finance Weekly, August 1st, 2022