The federal government will have strong footprints in state-owned enterprises (SOEs) even after approval of a new Act of parliament, which is contrary to the objectives of ensuring efficient and financially viable public sector firms by ending political interference.

The draft of State-owned Enterprises (Governance and Management) Act 2021 suggests that the government still does not want these entities to be truly free from political meddling. But the general principles and objectives mentioned in the proposed legislation indicate that the entities may be revived, subject to meaningful autonomy.

The federal cabinet has already approved the SOEs bill as part of a condition of the International Monetary Fund (IMF) loan programme, which will now be tabled in parliament for approval. The SOEs bill is a step in the right direction but it will need significant changes.

Where the federal government gave up almost every bit of authority in the name of autonomy for the State Bank of Pakistan (SBP), it appeared to be retaining control of public sector enterprises that were causing enormous losses to the public purse. The bill has proposed that at least 85 entities will be run as commercial enterprises and will not be responsible for public good. But various clauses of the bill severely undermine the autonomy that a commercial enterprise needs to remain financially viable.

The government has proposed the creation of Board Nomination Committee that will be headed by the minister in charge, with the concerned secretary and secretary finance or his nominees of at least BS-21 as members, says Clause 10 of the bill.

The nomination committee will nominate and recommend candidates to the federal government as independent directors on boards of SOEs. This has kept the doors open for political influence and is also considered to be against good corporate governance.

The bill also proposes the creation of Central Monitoring Unit (CMU) in the Finance Division, which will effectively supervise the work of SOEs by undertaking an analysis of the financial, commercial and operational output of these units.

The Ministry of Finance does not have the capacity to undertake such a task and its past experience also shows that SOEs cannot be managed from the Q-block. The proposal to report to the CMU will also undermine the independence of boards that have been directed to report to the CMU on policy matters.

Interestingly, the law also proposes that the federal government may establish a corporate body to undertake the functions of CMU. A company will be set up to monitor and supervise the work of SOEs.

The CMU will create an additional layer of bureaucracy.

The law also proposes that the board of every SOE will make a business plan in consultation with the division to which the SOE business has been allocated under the Rules of Business 1973.

The draft business plan under consultation will be simultaneously submitted to the CMU and the adopted business plan will be submitted to the federal government for information, according to the proposal.

Clause 7 of the bill says the “primary objective of a commercial SOE will be to generate sufficient revenues to cover their costs and be financially sustainable and the federal government shall not require it to undertake a public service obligation which deviates from the primary objective.”

However, in case the federal government directs a commercial SOE to provide specified services through cross-subsidy, the cost between different groups of users and the revenue collected by the commercial federal government and commercial SOE will be picked by the government or other users, according to the bill.

The government has also retained the right of adding or excluding any SOE from the purview of the proposed law, retaining its discretionary powers to influence their decision-making.

The law requires approval of policies and appointments by the federal cabinet, which is also tantamount to micromanaging their operations.

Under Section 17, it is envisaged that no administrative or standing instructions by any division of the federal government shall be applicable to SOE unless prior approval of the federal government is obtained, which exposes the boards to the political meddling.

The law will also apply to SOEs that are listed at the stock exchange and are also governed under the Code of Corporate Governance and Listing Regulations. The entire arrangement is based on the understanding that overall control and superintendence over the company would be exercised by the board. If the board is required to obtain concurrence of the line ministry/CMU for the business plan and budget then it can be viewed as a departure from the established principles of company law.

As per Section 18, the responsibility for the appointment of CEO has been exclusively given to the board of directors. No person can hold office as chairman and chief executive of a state-owned enterprise simultaneously, and the office of the chairman shall be separate and his responsibilities distinct, from those of the chief executive officer.

The SOEs will maintain independent procurement policies with the approval of the federal government and shall only be responsible for compliance of the provisions of the Public Procurement Regulatory Authority Ordinance, to such extent as may be directed by the federal government. The bill promises financial transparency and publication of its annual accounts in a summary form.

Published in The Express Tribune, March 26th, 2021.

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