SOEs burden on taxpayers no surprise
Published Date: 24 February 2025
Published in: Business Recorder
Conventional economic theory argues that pursuit of privatisation is to enhance service quality, attract private investment, reduce government intervention and improve accountability and transparency in the management of public assets.
In Pakistan, administration after administration has pursued privatisation to reduce the budgeted allocation for loss making entities.
The incumbent Finance Minister Muhammad Aurangzeb is no exception and leaves no opportunity to argue that the private sector must be allowed to take the lead role in Gross Domestic Product (GDP) growth.
This in spite of the fact that the programme he negotiated with the International Monetary Fund (IMF) specifically states that: “The state’s support of businesses through subsidies, favourable taxation arrangements, protection and governmental price setting has undermined the development of a dynamic and outward oriented economy.
Subsidies have taken the form of low-cost financing and other concessions, which, although varied across industries, left financing and taxes net of subsidies more favourable than in peer economies and less-favoured sectors.
The tax system has been extensively used to provide non-transparent support through exemptions for privileged sectors like real estate, agriculture, manufacturing, and energy, as well as, through the proliferation of Special Economic Zones……Despite all this support, the business sector has failed to become an engine of growth, and the incentives eventually weakened competition and trapped resources in chronically inefficient (including perpetually “infant”) industries.“
To add to this damning indictment of the performance of the private sector by the IMF, the Large Scale Manufacturing Sector’s performance over the past few years has been in the negative territory (negative 1.32 percent July-November 2024) and negative 3.81 percent in November 2024.
A study undertaken by the Central Monitoring Unit (CMU) of the Finance Division, set up in 2023 as per the IMF report, carried out a rigorous analysis with the full operationalizing of the CMU under the SOE Act 2023.
The report titled “Aggregate Annual Report Federal State Owned Enterprises (SOEs) financial year 2023” was uploaded on the Finance Division website this week past and noted: “aggregate losses of these entities for the past 10 years totalled 5,595 billion rupees.
The Government of Pakistan provided aggregate support of 1,021 billion rupees, in the form of equity injections 267 billion rupees, grants 223 billion rupees, subsidies 403 billion rupees, and loans 128 billion rupees to sustain these SOEs and support the economy.
However, this support represented more than 10 percent of the federal budget’s receipts, indicating significant fiscal strain.“
The IMF staff level report dated October 2024 maintained that “SOEs provide poor quality services and made large losses, absorbing 8.5 percent of GDP in direct budgetary support (cumulative since 2016).
In addition, as of end December 2023 the government guaranteed loans amounting to 1518 billion rupees, mostly to SOEs with total lending to SOEs by commercial banks reaching 1710 billion rupees.“
The SOEs reliance on sovereign guarantees not only places an additional pressure on individual entities financial stability but also, not highlighted in the report, the limit on extending sovereign guarantees as per the Fiscal Responsibility and Debt Limitation (Amendment) Act 2005 as well as under the ongoing Fund programme is at present maxed out.
The Fiscal Responsibility and Debt Limitation (Amendment) Act 2005 under subsection 3, clause (d) imposes two ceilings on government guarantees: (i) 2 percent of GDP with renewals considered as issuing new guarantees and (ii) 10 percent of GDP on total stock of outstanding guarantees.
By March 2024 total guarantees outstanding stock was 3505 billion rupees with power sector accounting for 70 percent, Pakistan International Airlines (PIA) 7 percent, oil, and gas 3 percent, financial 3 percent, Sindh Engro 2 percent.
The outstanding guarantees against commodity operations were not included, operations undertaken by Trading Corporation of Pakistan (TCP), Pakistan Agriculture Storage and Services Corporation (PASSCO) and provincial governments whose outstanding stocks were 1133 billion rupees by end-March 2024.
Estimated guarantee issuance and position (April-June 2024 and July-June 2025) was reported in the Annual Budget Statement 2024-25 as follows: (i) Opening guaranteed debt position on 31 March 2024 at 3.685 trillion rupees and (ii) new guarantees to be issued (April 2024 to June 2025) were projected at 711 billion rupees including Reqodik 230 billion rupees, C-5 (Chashma Nuclear power) 143 billion rupees, Public Private Partnership 106 billion rupees, Pakistan State Oil 100 rupees, Sui Northern Gas Pipeline Limited (SNGPL) 50 billion rupees Pakistan International Airlines Investment Limited (PIAIL) and Pakistan International Airlines Corporation Limited (PIACL) together envisaged 46 billion rupees, EXIM bank 10 billion rupees.
The mitigation measures suggested in the report are sadly of a pro forma nature and while they are in conformity with donor agencies standard normal time bound quantitative conditions and structural benchmarks, yet one would have hoped that given that the report was carried out by the CMU embedded in the Finance Division out of the box in-house mitigating measures had been identified rather than the same recommendations that have consistently failed to be implemented in the past. Four key recommendations were highlighted for SOE resilience.
First, strengthen financial controls and governance practices. It would have been more practical to make it mandatory (through legislation if required) for all SOEs to report accurately to the Auditor General of Pakistan and in case of any irregularities for the matter to be sent to an independent tribunal empowered to take punitive measures to enforce its decisions based on findings.
The need to implement governance reforms by bringing the workforce numbers of the SOEs to the same level as indicated by international best practices is an objective that the government has rhetorically committed to.
In addition, each new administration changes the board of directors of SOEs but with no positive impact on the SOEs financial health. The report recommends including more independent directors, technically qualified, free of political affiliations and fully independent – standard recommendations that have not worked in this country.
A better option would be to establish a three-member integrity team tasked to filter applicants (directors and senior management), a team that was set up under Nawaz Sharif’s tenure as per the court’s recommendation during his 2013-17 tenure, but the team disbanded itself when the government refused to follow its suggestions.
Second, diversify energy portfolio to include renewable sources – a recommendation that is divorced from the macro energy picture as the government is contractually obligated to pay capacity payments to Independent Power Producers in case of lower demand.
Thirdly, modernize infrastructure and adopt advanced technologies – a suggestion that requires fiscal space that is not available today; and finally, enhance transparency in financial reporting and regulatory compliance.
To conclude, the Finance Minister would be well advised to back off from support of the private sector as the engine of growth – a support that he has in any case pledged to the Fund to withdraw directly and through contractionary monetary and fiscal policies.
This may be a long-term goal but in the short to medium term (at least up to the end of the IMF programme in 2028) it would be advisable to support the public sector as the engine of growth through out-of-the-box measures, including streamlining the appointment system (through establishing an integrity department), and a tariff structure that does not overly tax utilities and instead raises reliance on direct taxes as a revenue source.
