Pakistan: Public Sector Enterprises Reform Program (Subprogram 1)

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Lessons

Stakeholder engagement benefits the design and implementation of programs/projects.

This subprogram has demonstrated the benefits of Asian Development Bank (ADB) internal consultations and stakeholder engagement in the design and implementation, especially of reform programs. Consultations among the relevant ADB divisions enriched subprogram formulation, specifically ensuring that (i) knowledge from previous similar experiences were built into the design and (ii) subprogram design and timing were in synergy with other ongoing and planned interventions in Pakistan by ADB and other development partners. Sustained policy dialogues generated high-level government support throughout the project cycle. Consultations with the affected public sector enterprises (PSEs) generated feedback that were most helpful in incorporating employee needs and interests to the subprogram policy actions and implementation approaches. Moving forward, the communication strategy formulated under this subprogram, which targets all key stakeholders and the general public, is expected to develop broad support and facilitate the smooth completion of the government’s PSE reform agenda.

Project Cycle Stage:

Preparation

Implementation

Building a consensus on the role of government and core public services can facilitate the implementation of public sector reforms.

Examination during subprogram preparation of the country’s privatization experience highlighted the need for consensus to be developed on government’s role and core public services, lack of which accounted for much of the shortcomings in past efforts. Vested interests and corporate governance issues, which made it hard for PSE reforms to take off in certain sectors, were addressed right at the outset. By aligning the subprogram to the overall government PSE reform agenda, obstacles were significantly diminished, and stronger government commitment was elicited. Wide governmental interagency discussions on the costs and benefits of reforms further facilitated subprogram implementation

Project Cycle Stage:

Implementation

Close monitoring and regular dialogue are necessary to effectively manage complex reforms.

Pakistan’s politics of reform, which can be complicated particularly during political transitions, needed to be closely monitored and properly responded to. While identifying pro-reform leaders was important, involving a broader support base would have helped in better managing the risks and uncertainties associated with the changing political climate and reform commitments. Nevertheless, through intensive dialogue, the subprogram was able to overcome the challenges that came along with political transitions. Future similar interventions should aim to better manage the complexity of PSE and public service management reforms by being more flexible and drawing in the broadest number of public servants to the side of reforms.

Project Cycle Stage:

Implementation

Reforms take time.

Completion of this subprogram substantially improved the public financial management system of PSEs, specifically in terms of financial reporting, budgeting, and internal auditing. The policy actions, however, did not deliver the desired outcome of increased PSE profitability and incomes over the short, one-year implementation period. But as it has enabled the government to calibrate its PSE reform policy and plan and targets over the medium-term, subprogram 1 succeeded in setting off the realization of long-lasting public service reforms within a realistic timeframe. While sustaining the momentum for reforms already achieved, subprogram 2, approved within the same month this subprogram closed, focused on other structural reforms to support the commercialization, efficiency, and long-term profitability of PSEs in Pakistan

Project Cycle Stage:

Implementation

Background

Pakistan’s nationalization program in the 1970s led to significant government ownership of companies and parastatal bodies across all economic sectors. Recognizing the limitations of this setup, the government started privatizing selected entities in the 1990s. Still, as of 2014, it owned 191 public sector enterprises (PSEs), some of which were profitable, while most were struggling to make profits. Many PSEs thus had to rely on regular discretionary fiscal transfers and government credit guarantees to maintain operations.

To reduce fiscal deficit and overall borrowings, the government started to drastically cut PSE transfers and allocations in 2014. Total budgetary transfers to PSEs consequently declined from 3.1% of gross domestic product (GDP) in 2012 to 1.5% of GDP in 2015. To support the government’s PSE reform agenda, the Asian Development Bank (ADB) approved the Public Sector Enterprises Reform Program in June 2016, allotting a $300 million policy-based loan for subprogram 1 (SP1).

This report covers SP 1, which aimed to reduce the net fiscal transfers to PSEs from the federal budget, as impact, and improve the performance of PSEs, as outcome. SP 1 set out to deliver three outputs (i) PSE privatization communication strategy and policies to address labor issues introduced, monitoring system designed, and costs and benefits ascertained; (ii) financial transparency, monitoring, and corporate governance of PSEs improved; and (iii) restructuring and reform of selected PSEs initiated. Pakistan Railways (PR), responsible for more than 70% of the country’s freight traffic since 1960 and which employed about 19% of the total 420,000 PSE labor force, was selected for restructuring and reforms in overall financial management, audit, human resources, and transparency in procurement.

Through 13 policy actions, SP 1 delivered all its planned outputs, mostly exceeding targets. A communication strategy to develop strong public and stakeholder support for PSE privatization and restructuring and voluntary separation and pension policies was approved by the Privatization Commission Board and subsequently implemented. Annual publication of the financial performance report of the federal government PSEs was started by the Ministry of Finance (MOF). PSE submission to the Securities and Exchange Commission in Pakistan (SECP) of audited statements, and statements of compliance with corporate governance rules (CGR) had commenced, with CGR compliance rate meeting the 35% target for 2016 and improving to 61% in June 2018. Moreover, SECP quarterly reports on non-compliant PSEs had enabled the MOF to take the necessary actions.

Targets in PR restructuring and reform, to which 6 of the 13 policy actions were directed, had likewise been substantially achieved. A risk-based internal audit system had been established and continued to be enhanced in line with international best practices. A digital database was improving PR’s efficiency in identifying and monitoring all land-based assets, eventually capturing the fair value of these assets in its balance sheet. A public-private partnership unit had been created. All tenders and bid evaluation reports began to be web-publicized, and the procurement process had been shortened from 150 days to 120 days.

While it succeeded in meeting nearly all its output targets, SP 1 fell short of achieving its outcome targets in raising PSE annual net profits and dividend incomes. Factors beyond PSE control, like oil prices, inflation, exchange rate fluctuation, peace and order problems, and natural calamities, accounted for the shortfalls.

The project was executed by the MOF. A project management unit within the MOF coordinated the activities of the five implementing agencies: the MOF’s Finance Division, Ministry of Railways, Pakistan Railways, the Privatization Commission, and the SECP.

Project Information

Project Name:

Public Sector Enterprises Reform Program (Subprogram 1)

Report Date:

August, 2018

Main Sector:

Public Sector Management

Country:

Pakistan

Project Number:

48065-002

Report Type: