48065-003: public sector enterprises reform program … · 2019. 9. 21. · pre1.00 = $0.00954...

Completion Report

Project Number: 48065-003 Loan Number: 3538 September 2019

Pakistan: Public Sector Enterprises Reform Program (Subprogram 2) This document is being disclosed to the public in accordance with ADB’s Access to Information Policy.

CURRENCY EQUIVALENTS Currency unit – Pakistan rupee/s (PRe/PRs)

At Appraisal At Project Completion

(23 May 2017) (30 June 2018) PRe1.00 = $0.00954 $0.00823

$1.00 = PRs104.81 PRs121.50

ABBREVIATIONS

ADB CGR DISCO GDP IFRS MOF MOR PPP

– – – – – – – –

Asian Development Bank Corporate Governance Rules, 2013 (power) distribution company gross domestic product International Financial Reporting Standards Ministry of Finance Ministry of Railways public–private partnership

PSE PSERP SECP

– – –

public sector enterprise Public Sector Enterprises Reform Program Securities and Exchange Commission of Pakistan

NOTES

(i) The fiscal year (FY) of the Government of the Islamic Republic of Pakistan ends

on 30 June. “FY” before a calendar year denotes the year in which the fiscal year ends, e.g., FY2018 ends on 30 June 2018.

(ii) In this report, “$” refers to United States dollars.

Vice-President Shixin Chen, Operations 1 Director General Werner E. Liepach, Central and West Asia Department (CWRD) Director Tariq H. Niazi, Public Management, Financial Sector, and Trade Division,

CWRD Team leader Dai Chang Song, Principal Financial Sector Specialist, CWRD Team members Llona Isabel Marty, Associate Project Analyst, CWRD

Sana Masood, Senior Project Officer (Financial Sector), Pakistan Resident Mission, CWRD

Elinor Piano, Project Analyst, CWRD Maria Celeste Yabut, Senior Project Assistant, CWRD

In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

CONTENTS

Page

BASIC DATA i

I. PROJECT DESCRIPTION 1

II. DESIGN AND IMPLEMENTATION 2

A. Project Design and Formulation 2 B. Project Outputs 3 C. Project Costs and Financing 5 D. Disbursements 5 E. Project Schedule 5 F. Implementation Arrangements 5 G. Technical Assistance 6 H. Consultant Recruitment and Procurement 6 I. Monitoring and Reporting 6

III. EVALUATION OF PERFORMANCE 6

A. Relevance 6 B. Effectiveness 7 C. Efficiency 8 D. Sustainability 8 E. Development Impact 9 F. Performance of the Borrower and the Executing Agency 9 G. Performance of the Asian Development Bank 9 H. Overall Assessment 10

IV. ISSUES, LESSONS, AND RECOMMENDATIONS 10

A. Issues and Lessons 10 B. Recommendations 11

APPENDIXES

1. Design and Monitoring Framework 13

2. Status of Compliance with Loan Covenants 18

3. Status of Compliance with Policy Actions 21

BASIC DATA A. Loan Identification

1. Country Islamic Republic of Pakistan 2. Loan number and financing source 3538 (concessional ordinary capital

resources lending) 3. Project title Public Sector Enterprises Reform Program

(Subprogram 2) 4. Borrower Islamic Republic of Pakistan 5. Executing agency Ministry of Finance 6. Amount of loan $300 million 7. Financing modality Policy-based loan

B. Loan Data

1. Fact-finding – Date started – Date completed

17 April 2017 19 April 2017

2. Loan negotiations – Date started – Date completed

23 May 2017 23 May 2017

3. Date of Board approval 22 June 2017

4. Date of loan agreement 22 June 2017

5. Date of loan effectiveness – In loan agreement – Actual – Number of extensions

20 September 2017 22 June 2017 0

6. Project completion date – Appraisal – Actual

30 June 2018 30 June 2018

7. Loan closing date – In loan agreement – Actual – Number of extensions

30 June 2018 30 June 2018 0

8. Financial closing date – Actual

30 June 2018

9. Terms of loan – Interest rate – Maturity (number of years) – Grace period (number of years)

2% 25 years 5 years

10. Terms of relending (if any)

Not applicable

ii

11. Disbursements

a. Dates

Initial Disbursement 23 June 2017

Final Disbursement 23 June 2017

Time Interval 0 months

Effective Date 22 June 2017

Actual Closing Date 30 June 2018

Time Interval 12 months

b. Amount ($ million)

Category

Original Allocation

(1)

Increased during

Implementation (2)

Canceled during

Implementation (3)

Last Revised

Allocation (4=1+2–3)

Amount Disbursed

(5)

Undisbursed Balance (6 = 4–5)

Loan 3538 300.00 0 0 300.00 300.00 0 Total 300.00 0 0 300.00 300.00 0

C. Project Data

1. Project cost ($ million)

Cost Appraisal Estimate Actual

Foreign exchange cost 300.00 300.00 Local currency cost 0 0 Total 300.00 300.00

2. Financing plan ($ million)

Cost Appraisal Estimate Actual

Implementation cost Borrower financed 0 0 ADB financed 300.00 300.00 Other external financing 0 0 Total implementation cost 300.00 300.00

3. Cost breakdown by project component: Not applicable

4. Project schedule: Not applicable

5. Project performance report ratings: Not applicable

D. Data on Asian Development Bank Missions

Name of Mission Date No. of

Persons No. of

Person-Days Specialization of Members

Reconnaissance 14–17 February 2017 3 12 a, c, d Fact-finding 17–19 April 2017 3 9 a, c, d Project completion review 15–18 July 2019 2 8 b, c

a = principal public management specialist, b = principal financial sector specialist, c = senior project officer, d = senior economics officer.

I. PROJECT DESCRIPTION 1. To further support the Government of Pakistan in its ongoing public sector enterprise (PSE) reform agenda, Asian Development Bank (ADB) approved a $300 million loan for subprogram 2 of the Public Sector Enterprises Reform Program (PSERP) in June 2017.1 The PSERP subprogram 2 aimed to improve the performance of PSEs through strengthening corporate governance and accountability, identifying and reducing PSE contingent liabilities, and initiating critical reforms. By consolidating the reforms initiated under subprogram 1, subprogram 2 facilitated the government in augmenting fiscal space for critical development expenditures. Several policy actions included in subprogram 1 for effective implementation were sequenced. The programmatic approach facilitated chronological sequencing of reforms over an adequate period within a flexible framework and facilitated changes in the proposed policy actions in the event of exogenous shocks. Under subprogram 1, (i) the Privatization Commission approved an effective communication and labor strategy for privatization; (ii) the Securities and Exchange Commission of Pakistan (SECP) took effective measures to improve compliance with the Public Sector Companies Corporate Governance Rules, 2013 (CGR); (iii) the Finance Division of the Ministry of Finance (MOF) mandated task forces to bring all PSEs under the ambit of the CGR, ensure women representation on the boards of PSEs, and improve performance evaluation criteria for the boards; and (iv) restructuring of Pakistan Railways was initiated. The International Monetary Fund’s last concluded supported program under an Extended Fund Facility had been directed to macroeconomic stabilization. The program required both fiscal and monetary discipline to establish a sustainable fiscal path and reduce inflation. Beyond macroeconomic stabilization, the program also included structural reforms, especially privatization of some federal PSEs for the sake of economic efficiency. 2. Despite the government’s reform initiatives, PSEs remained generally in weak financial health and continued to rely on significant regular fiscal transfers and sovereign credit guarantees to maintain their operations. According to the State Bank of Pakistan, as of June 2018, the outstanding domestic debt and liabilities of the PSEs totaled PRs1,068.2 billion, or 2.6% of gross domestic product (GDP), an increase of 7.2% compared to the same period in the previous year. As of June 2018, the government’s external debt contracted for PSEs increased by 13.74% over the previous year to $324.6 million.2 The underlying reasons for the poor performance are weak management and governance, political influence in PSEs’ management, low labor productivity, quickly deteriorating capital equipment, soft budget constraints, and tariffs below full cost-recovery levels. Investments in the past have been insufficient to support competitiveness and quality service delivery. 3. Historically, budget allocations to support PSEs’ daily operations have been substantial. Those outlays limited the government in supporting critical capital development expenditures to improve PSE efficiency and service delivery. In the case of Pakistan Railways, for example, with a workforce of approximately 78,000, about 70% of annual budgetary resources (equivalent to about $375 million in 2015) are allocated for staff salaries and pension payments. This limits the government’s capacity to fund such critical capital investments as modernization of its fleet and equipment for both freight and passenger services. This has negatively impacted Pakistan Railways’ operational capacity, resulting in reduced market share and overall lower productivity.

1 ADB. 2017. Report and Recommendation of the President to the Board of Directors: Proposed Policy-Based Loan

for Subprogram 2 to the Islamic Republic of Pakistan for the Public Sector Enterprises Reform Program. Manila. 2 State Bank of Pakistan. 2019. Pakistan’s Debt and Liabilities-Summary. Karachi.

http://www.sbp.org.pk/ecodata/Summary.pdf

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4. Unfunded pensions and other retirement benefits have been identified as key constraints for timely privatization of power distribution companies (DISCOs). To address this critical issue, subprogram 2 included establishment and funding of Retirement Cost Funds to address unfunded pension liabilities and other retirement benefit liabilities of eight DISCOs.3 Subprogram 2 also supported ongoing reforms in Pakistan Railways while building upon accomplishments under subprogram 1. Under subprogram 2, moreover, the government was to restructure and/or privatize other PSEs, including SME Bank Ltd.4

5. Improving PSEs’ operational performance will further reduce budgetary support from the government and give it capacity to redirect these funds to other priority capital projects that support economic growth. An inability of successive governments to carry out structural reforms in PSEs has drained scarce fiscal resources. In order to successfully reform the PSEs and make them commercially viable, the government requires budgetary support to implement a comprehensive reforms strategy. 6. The program’s impact was to reduce net fiscal transfers to PSEs from the federal budget, and its outcome was to improve the performance of PSEs. To achieve this, the program’s outputs were to (i) address labor issues, introduce a communication strategy, and assess costs and benefits; (ii) improve financial transparency, monitoring, and corporate governance in PSEs; and (iii) initiate restructuring and reforms in selected PSEs. Subprogram 2 builds upon the outputs achieved in subprogram 1 while continuing down the path of institutional reforms and improving the commercialization and profitability of PSEs in the long term, thereby decreasing their need for periodic government support.5

II. DESIGN AND IMPLEMENTATION 7. Under the PSERP, the MOF, through its Finance Division, was the executing agency (footnote 5). The Implementation and Economic Reforms Unit under the Finance Division served as program management unit for overall coordination, reporting, and implementation of the program. The Finance Division, Ministry of Railways (MOR), Pakistan Railways, the Privatization Commission, and the SECP were the implementing agencies. Subprogram 2 was designed to be implemented over 12 months from 30 June 2017 to 30 June 2018. A. Project Design and Formulation 8. At appraisal, the PSERP was highly relevant to and consistent with ADB’s country partnership strategy for Pakistan, 2015–2019,6 which supported key strategic areas of reforms to improve productivity and public service delivery, attract private sector investments, and bring about structural transformation through institutional reforms. The program was also aligned and consistent with the country’s development road map and implementation strategy under Pakistan Vision 2025, which affirms the government’s commitment to improving loss-making PSEs into

3 The eight DISCOs are (i) Faisalabad Electric Supply Company, (ii) Gujranwala Electric Power Company, (iii)

Hyderabad Electric Supply Company, (iv) Islamabad Electric Supply Company (IESCO), (v) Lahore Electric Supply Company (LESCO), (vi) Multan Electric Power Company (MEPCO), (vii) Peshawar Electric Supply Company, and (viii) Sukkur Electric Supply Company.

4 SME Bank is a public limited company incorporated in Pakistan on 30 October 2001. It was issued a banking license on 13 September 2004.

5 ADB. 2016. Report and Recommendation of the President to the Board of Directors: Proposed Programmatic Approach and Policy-Based Loans for Subprogram 1 to the Islamic Republic of Pakistan for the Public Sector Enterprises Reform Program. Manila.

6 ADB. 2015. Country Partnership Strategy: Pakistan, 2015–2019. Manila.

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profit-making entities through restructuring and eventually strategic privatization of selected PSEs.7 9. At the design stage, ADB looked at key lessons learned from a past ADB country review8 and assessments of other, similar development programs from the World Bank.9 It incorporated these lessons into the formulation of policy actions for the PSERP. The policy actions were also designed to complement ADB’s public–private partnership (PPP) initiatives in Pakistan and other ADB interventions in the transport sector.10

10. In mid-FY2013, the government embarked on a PSE reform program to increase PSEs’ financial viability and reduce fiscal transfers. To facilitate the government’s reform initiatives, ADB approved subprogram 1 of the programmatic approach in June 2016. Subprogram 2 continues reforms initiated under subprogram 1. Subprogram 2 is part of an integrated solution comprising policy-based loans under a programmatic approach and with clear program costs.

11. The program supports implementation of improved corporate governance, better monitoring of PSEs’ performance, reforms related to labor, structural reforms in selected PSEs, and continued assistance on reforms initiated in subprogram 1 to consolidate and sustain gains. Implementation of PSE reforms entails substantial adjustment costs, which constitute a major challenge in Pakistan’s current fiscal context. These costs must be supported in a phased manner. 12. At completion, the PSERP remains highly relevant as the government continues to address the inefficiencies and weaknesses of the PSEs. The government’s reforms in PSEs are supported in subprogram 2 to further implement deeper structural reforms that improve general public awareness, corporate governance compliance, and privatization of targeted PSEs.

B. Project Outputs 13. The PSERP had three general outputs: (i) policies to address labor issues and communication strategy introduced, and costs and benefits assessed; (ii) financial transparency, monitoring, and corporate governance in PSEs improved; and (iii) restructuring and reform of selected PSEs initiated. There were 16 policy actions under subprogram 2. The outputs and corresponding policy actions were not changed over the implementation phase. Details of the status of compliance for the 16 policy actions are in Appendix 3. 14. Output 1: Policies to address labor issues and communication strategy introduced, and costs and benefits assessed. Under subprogram 1, the Privatization Commission Board designed the commission’s strategy and policies addressing the labor issues pertaining to workers’ voluntary separation schemes. Under subprogram 2, (i) the Privatization Commission issued a public awareness activities report highlighting the costs and benefits of the PSE reforms,

7 Government of Pakistan, Ministry of Planning, Development & Reform. 2014. Pakistan 2025. One Nation – One

Vision. Islamabad. 8 Independent Evaluation Department. 2013. Country Assistance Program Evaluation: Pakistan: 2002–2012—

Continuing Development Challenges. Manila: ADB. 9 Independent Evaluation Group. 2012. Project Performance Assistance Report: Egypt—Egypt Financial Sector

Development Policy Loan, Egypt Second Financial Sector Development Policy Loan; Guatemala—Guatemala Financial Sector Adjustment Loan; Morocco—Morocco Financial Sector Development Policy Loan; Pakistan—Banking Sector Restructuring and Privatization, Banking Sector Development Policy Program. Washington, DC: World Bank. http://ieg.worldbank.org/Data/reports/fsdlp-multi-country-ppar.pdf.

10 ADB. 2015. Technical Assistance to the Islamic Republic of Pakistan for Enabling Economic Corridors through Sustainable Transport Sector. Manila.

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(ii) the MOF also issued a report on progress achieved in accomplishing the critical PSE reforms and covering detailed assessments on costs incurred in carrying out the programmatic approach, and (iii) each DISCO established a separate trust for its Retirement Cost Fund with an independent board of trustees. The MOF also allocated PRs15 billion in the FY2018 annual budget for PSEs’ reforms in the power sector. 15. Output 2: Financial transparency, monitoring, and corporate governance in PSEs improved. The MOF approved a report on the structure of the information technology systems and the implementation plan. It also (i) published the financial performance reports of all federal PSEs for FY2015 on its website along with gender disaggregated information on members of their boards of directors, and (ii) submitted a progress report on the preparation of financial performance reports for all federal PSEs for FY2016. Subsequently, the MOF published the financial performance reports of all federal PSEs for FY2016 and FY2017. 16. Statements of compliance with CGR for FY2018 were submitted together with the audit opinions by 59% of all the federal PSEs. The SECP submitted all quarterly reports of CGR noncompliance to the MOF up until 30 June 2019. The SECP published on its website the names of those federal PSEs noncompliant with CGR up until 30 June 2019. Other actions of the government were (i) the MOF issued a notification subjecting all federal PSEs to CGR, thereby including PSEs not registered under the Companies Ordinance, 1984; (ii) the government amended Rule 12 of the CGR to empower the nomination committees of PSEs to evaluate board candidates, including those candidates recommended by the government; (iii) the government amended Rule 8 of the CGR to require each director of a PSE to sign a performance contract at the time of appointment and to require annual performance evaluation of PSE directors, including the chairpersons and chief executive officers; and (iv) the Senate Standing Committee on Finance approved a change in the Companies Act, 2017 making it mandatory to have female members on the boards of public interest companies. Output 2 also includes policy actions involving gender disaggregated information in PSE financial performance reports and having at least one female member on a PSE’s board. As of 30 June 2018, among the 1,606 board members in 229 PSEs, there were 54 female board members on the boards of 67 PSEs. Having women on the boards contributes to (i) increased economic empowerment of women professionals, (ii) improved women’s readiness for top management positions, and (iii) greater influence encouraging more equitable gender balance in management positions. 17. Output 3: Restructuring and reform of selected PSEs initiated. The government (i) submitted an action-taken report on restructuring of House Building Finance Company that includes formulation of board, efficiency and capacity improvement, simplification of capacity improvement, recovery drive for nonperforming loans, provision of new resources and approval of new business plan; (ii) invited expression of interest for acquisition of 93.88% of shares in SME Bank Limited and subsequently issued expression of interest for appointment of a financial advisor on 11 January 2019; and (iii) initiated a corporatization process for Postal Life Insurance in accordance with a roadmap approved by the Ministry of Communications. The MOR has issued guidelines for implementing a risk-based internal audit system, and it has taken steps necessary to strengthen the internal audit system and to conduct risk-based auditing. The MOR has submitted the interim report along with key recommendations. It has submitted the report on establishment of the land database and has completely reconciled the land assets database. The MOR has submitted the detailed report, and, although its PPP unit has been operationalized with interim arrangements utilizing the existing human resources available to MOR, full-time dedicated staff have yet to be recruited. The MOR has commenced the process of adopting International Financial Reporting Standards (IFRS) and submitted its implementation report providing timelines for completing IFRS-based financial statements for FY2018. The MOR initiated the transition to

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enterprise resource planning, submitted the action report on procurement reforms, and begun uploading the bid evaluation reports for all the major items to its website www.pakrail.gov.pk. C. Project Costs and Financing 18. The program size was based partly on the need to address four large cost items critical to PSE-related reforms: (i) voluntary separation costs, (ii) funding of a retirement benefit fund to manage unfunded pensions and other retirement liabilities of workers, (iii) cost of vocational and other training programs, and (iv) communication costs. At appraisal, development financing needs were estimated at about $900 million over the next 2 years, of which an estimated $640 million would be used to cover the shortfall in the government’s support to PSEs for FY2017 and FY2018, an estimated $150 million would finance the contribution to the Retirement Benefit Fund, $80 million would go to financial support to DISCOs, and the balance of $20 million would finance training and communication. The program was expected to finance 67% of these development financing needs. ADB provided $300 million under subprogram 1. The expected improvements in PSE performance and efficiency justified the costs of the program. D. Disbursements 19. ADB provided a policy-based loan of $300 million sourced from its ordinary capital resources of the Asian Development Fund. The loan was approved by the ADB Board of Directors and was made effective on 22 June 2017. All 16 policy actions achieved full compliance and the loan was fully disbursed on 23 June 2017. E. Project Schedule 20. The PSERP was implemented on 30 June 2017, completed on 30 June 2018 without any extensions, and there was compliance with all policy actions agreed at loan approval. F. Implementation Arrangements 21. The implementation arrangements designed at appraisal were satisfactory and no changes were made during implementation of subprogram 2. The borrower, through the Finance Division of the MOF, provided overall supervision of the programmatic approach and regularly monitored progress of that approach. The MOF, through the Finance Division, was the executing agency. It was supported by the Implementation and Economics Reform Unit within the Finance Division that served as the program management unit responsible for overall coordination and reporting during implementation. Implementation arrangements were adequate, and the program management unit coordinated the activities of all the implementing agencies to deliver the program. The program management unit coordinated the respective activities of the five implementing agencies, which were the Finance Division, MOR, Pakistan Railways, the Privatization Commission, and the SECP.

http://www.pakrail.gov.pk/

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G. Technical Assistance 22. On 15 December 2014, ADB approved program preparatory technical assistance for the program ($500,000) with the MOF as executing agency.11 The technical assistance engaged 12 individual consultants (8 national consultants and 4 international consultants) with expertise in legal, regulatory, financial management, fiscal policy, and PSE reform. The consultants provided relevant and timely inputs in formulating the policy matrix and the overall design framework for the PSERP covering three key reform areas. Three minor changes were approved. One change allowed extension of the national financial management expert and national regulatory expert for an additional 6 months, as well as engagement of a national corporate finance expert and an international exports specialist. One amendment facilitated early termination of contracts of three international consultants to free up funds for national consultants needed for subprogram 2. Performance of the consultants was generally satisfactory. The program preparatory technical assistance was closed on 31 December 2018 and had an undisbursed balance of $105,447. H. Consultant Recruitment and Procurement 23. There was no procurement, advance contracting, or retroactive financing in relation to this processing of PSERP Subprogram 2. No other consultants were engaged except for the individual consultants under the program preparatory technical assistance. I. Monitoring and Reporting 24. As detailed in Appendix 2, the borrower is compliant and has ensured continued compliance with all the covenants. It has requested no waiver or change in the covenants. Prompt compliance with key covenants was observed. This performance is a result of thorough program preparation and effective dialogue with the borrower. The review team noted that the borrower was not required to submit periodic reports on covenant compliance and there was no periodic independent monitoring from ADB. 25. Key reporting requirements include publishing the annual financial performance reports of PSEs on the Finance Division website and listing on the SECP website PSEs failing to file a statement of compliance with CGR. Pakistan Railways is required to regularly upload the procurement tenders and major bid evaluation reports to its website.

26. All the PSEs are maintaining their account books in accordance with applicable accounting standards and relevant procedures. The PSE boards and shareholders approve the audited financial statements as per timelines prescribed in the Companies Act, 2017. Management letters are reviewed by the boards of directors.

III. EVALUATION OF PERFORMANCE A. Relevance 27. The PSERP subprogram 2 is rated highly relevant. The program was provided in response to the government’s deteriorating fiscal situation and urgent needs to increase state revenue, rationalize expenditures, and reduce the state’s debt burden. The objective of these reforms was to create fiscal space in the budget inasmuch as the government’s privatization plan can be

11 ADB. 2014. Technical Assistance to the Islamic Republic of Pakistan for Public Sector Enterprises Reform Program.

Manila (TA 8796-PAK).

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strengthened with public and stakeholder support to deliver economic and social benefits accruing to the government and individual citizens. Some PSEs have been set back by losses and are less than efficient. The major causes of such fiscal drainage can be attributed to poor corporate governance and financial management, as suboptimal utilization of resources results in much lower returns on assets compared to those of similar businesses in the private sector. The program design was appropriate at the time of appraisal. Its policy matrix and design and monitoring framework were sequenced and planned to improve governance and introduce deeper reforms within the respective PSEs through restructuring and privatization. 28. The PSERP remained highly relevant after completion, as evidenced by subprogram 2’s outcome. The program is consistent with the government’s PSE reforms agenda and with ADB’s country partnership strategy for Pakistan, 2015–2019, which supported institutional reforms and governance. Pakistan Vision 2025 affirms the government’s commitment to convert deficit-running public sector institutions into profit-making entities through a combination of improving governance, restructuring, and partial and outright privatization. The programmatic approach is appropriate for the intended program as it allows reforms to be phased in so that lessons from each subprogram can be applied to the next one. Continuous efforts are made by the government to identify PSEs’ weaknesses and introduce necessary reforms consistent with emerging trends and international best practices. Key reforms introduced were (i) approval of a communication strategy to facilitate privatization of PSEs, (ii) devising strategies to address labor issues, (iii) improving compliance with corporate governance, (iv) bringing all PSEs within the ambit of CGR, and (v) restructuring and privatization in selected PSEs. B. Effectiveness 29. The program was assessed effective in achieving the outcome of greater fiscal space in the government budget. As a result of the program, corporate governance, financial transparency, restructuring, and reforms were introduced in Pakistan Railways. The Privatization Commission is the government’s implementing arm in all areas of privatizing selected PSEs. Such economic reforms as privatization and restructuring of PSEs impact profoundly upon economic growth, poverty reduction, improved goods and services for consumers, and efficient management of state-owned enterprises transformed through such reforms. Reforms also have direct and positive impacts on reducing the national debt burden and creating jobs in sectors that have not shown optimal growth to date. Thereby, the reforms fulfill their objectives, benefiting society and the country as a whole. The program assisted the government in reducing fiscal transfer to PSEs from 0.8% of GDP for FY2015 to 0.4% of GDP for FY2018. 30. With the compliance and implementation of all the policy actions, the proportion of PSEs submitting CGR compliance statements has risen significantly (to more than 60% versus 35% at the start of the program). The performance monitoring mechanisms of PSEs’ boards have improved, all the PSEs have been brought within the ambit of CGR, and all are now required to have female board representation. Restructuring and privatizing of selected PSEs will gradually diminish the fiscal deficit-to-GDP ratio, thus creating fiscal space for the government.

31. The program initiated phased migration of Pakistan Railways’ financial management system from current accounting practices to an internationally recognized accounting standard (IFRS), including the adoption of accrual-based accounting. Pakistan Railways is preparing its first IFRS-based financial statements while fully implementing a system of enterprise resource planning. The accounts manuals have been revised and approved. Six codes have been revised and are in the approval process. PC-1 for establishment of the financial management information system (including software and hardware) is in process and expected to be achieved in the

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reporting cycle for the year ending June 2020. A complete restructuring and rationalization of Pakistan Railways’ workforce is also being carried out to improve operational efficiency. As a result of the program, the government has realized the importance of the private sector’s role in economic growth.

32. The privatization strategies were implemented, albeit slowly and with some of the envisaged privatization transactions being delayed. Also, improvements in the profitability of, and dividend income from, PSEs were still being achieved. C. Efficiency 33. The PSERP subprogram 2 is rated efficient. No major change was required in the scope of the program, all policy actions were completed, and the loan was disbursed on time. The efficiency was a result of (i) thorough program preparation, (ii) effective policy dialogue with the executing agency, and (iii) the government’s political commitment. However, the outcome cannot be achieved in a short period of time. Although financial performance of most of the PSEs have improved, factors such as delay in tariff notification for power sector by the government due to court cases, increased interest expenses from legacy debt of Pakistan International Airlines, and significant losses incurred by the National Highway Authority have negatively affected the whole profitability target of PSEs. Total dividend paid by PSEs to the government has increased to PRs91.5 billion for FY 2016-2017 indicating a 10% increase from the baseline target. D. Sustainability 34. The PSERP subprogram 2 is rated likely sustainable as the government has shown strong commitment to reforms. The policy actions under the two subprograms are sequenced in a manner to reduce the contingent liabilities and fiscal transfers while ensuring financial discipline through improved corporate governance, restructuring, and privatization of selected PSEs. The establishment and registration of separate trusts for the Retirement Cost Funds having independent boards of trustees and prudent investment policies mark a step toward financial autonomy and sustainability of the power sector PSEs. Establishing independent trusts will ensure transparency and professional management of funds. In addition, the government allocated PRs15 billion in the FY2018 annual budget for the power sector. Due to elections and a change in government, however, the allocated amount has yet to be transferred to DISCOs’ pension fund accounts. That is because DISCOs are not on the new government active privatization list as they were during FY2018. The government is planning some major reforms, such as to appoint professional managers for chief executive officers and to boards of directors. Moreover, the government is working on a list of DISCOs that will be privatized as agreed between the government and International Monetary Fund. The government will direct the previously allocated funds to those DISCOs on the new list to be privatized.12 35. Although the overall profitability of PSEs for FY2017 was not satisfactory, reforms under the PSERP will provide motivation to achieve certain profitability levels, especially with enforcement of the performance monitoring mechanism introduced by amendment to the CGR. As a result of the program, the SECP has significantly improved its compliance with the CGR. The program is also promoting private sector participation in the provision of public assets and services under a PPP approach. The creation of viable and bankable PPP transactions ensures not only improvements in service delivery but also minimizes the requirements for budgetary

12 Per the original list, finalized under the previous International Monetary Fund External Fund Facility program in 2013,

three DISCOs (IESCO, LESCO, and MEPCO) were designated for privatization. A new list will be finalized soon.

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support. Under the program, the cash-based accounting system of Pakistan Railways will shift to an accrual-based financial management system and preparation of the first IFRS-compliant financial statements is in process. The program has helped the government to plan financing requirements and to develop a coherent, well-coordinated approach for managing adjustment costs through joint support from development partners. The program has improved financial transparency through public disclosure of PSEs’ financial performance, as well as the MOF’s capacity to manage and monitor that performance. E. Development Impact 36. The program’s overall impact in terms of indicators is rated satisfactory. The PSERP subprogram 2 has supported the government in achieving and sustaining reform initiatives aimed at enhancing the performance of PSEs by improving their corporate governance and accountability and leading to reduced contingent liabilities. Subprogram 2 was critical in creating fiscal space for major development expenditures, as fiscal transfers to PSEs under subsidies and grants were reduced from 0.8% of GDP for FY2015 to 0.4% of GDP for FY2018. 37. PSERP subprogram 2 has augmented the policy actions achieved under subprogram 1 and further improved service delivery at Pakistan Railways and selected other PSEs. During implementation, the program played a critical role in building consensus on reform directions among relevant government agencies. It introduced significant institutional reforms at various levels, including privatization, restructuring, fiscal management, and governance. The program helped restructure line agencies, reduce duplication of functions, and improve operational efficiency of the SECP, Privatization Commission, and Pakistan Railways. Under the program, every PSE is now required under the Companies Act, 2017 to have at least one female board member. Coordination among various government agencies and the MOF has improved significantly, with the MOF leading the reform agenda to ensure that the program achieves substantial economic benefits in the long term. F. Performance of the Borrower and the Executing Agency 38. The performance of the government and the executing agency is rated satisfactory. From design preparation to implementation, the government, as well as the executing and implementing agencies, showed strong commitment in their timely compliance with the policy actions and willingness to support the PSERP. Some outputs are nevertheless lagging in terms of implementation, but efforts are being made to deliver the desired outcome. G. Performance of the Asian Development Bank 39. ADB’s overall performance is rated satisfactory. No extension was sought in the preparation and delivery of subprogram 2, and loan effectiveness and disbursement dates were achieved as per targeted dates. The Public Management, Financial Sector, and Trade Division within the Central and West Asia Department implemented subprogram 2 with support from the Pakistan Resident Mission. No major issues were encountered during implementation, although it was noted that the borrower did not respond to an initial formal request to submit a project completion report, and despite further follow-up requests, the project completion report was not provided. Further compliance review of the loan covenants was not conducted during implementation on the basis that all policy actions had been met already when the ADB Board of Directors approved the subprogram 2 loan.

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H. Overall Assessment 40. Overall, the PSERP is rated as successful. It was highly relevant in improving PSEs’ governance and effective in achieving targeted outcomes. Subprogram 2 was efficient in terms of timely implementation, with no extension required. Subprogram 2 is likely sustainable given the government’s ongoing commitment to PSEs’ reforms and improvements in governance compliance.

Overall Ratings

Criteria Rating

Relevance Highly relevant Effectiveness Effective Efficiency Efficient Sustainability Likely sustainable Overall Assessment Successful Development impact Satisfactory Borrower and executing agency Satisfactory Performance of ADB Satisfactory ADB = Asian Development Bank. Source: Asian Development Bank.

IV. ISSUES, LESSONS, AND RECOMMENDATIONS

A. Issues and Lessons 41. Key lessons from the program include the following:

(i) Country ownership. The potential for large shifts in the political and economic context can create significant implementation challenges. The program was able to succeed despite encountering such challenges because it was strongly aligned with Pakistan Vision 2025.

(ii) Country analysis. Careful country analysis and diagnosis of issues are essential to identify and prioritize ADB interventions and design programs.

(iii) Technical foundation. The program benefitted from, and integrated a range of, technical assistance, stakeholder feedback, active consultation within ADB’s divisions, incorporating lessons from previous ADB-funded reform programs, and recognizing issues identified in preparation of a new program. This provided a strong foundation for the program’s reform agenda, which meant policy actions were both well founded and viewed as appropriate by the government, despite the political and economic challenges.

(iv) Policy dialogues and simplicity. The program successfully supported high-level policy dialogue between the government and ADB that otherwise would have been difficult to achieve. As institutional capacity within the government remained constrained, dialogue focused on restricting the policy agenda to fewer policy actions with a sharper focus on the most important measures. That was key to avoid straying from the focus.

(v) Managing complexity and long-term process. The complexity and long-term process for economic and public sector reforms need to be recognized. One program loan cannot realistically be expected to achieve GDP growth, fiscal balance, plus efficient and effective use of resources by public enterprises. At the time of designing the PSERP outputs, objectives and development goals were realistically linked with policy conditionality.

11

(vi) Overcoming program lending’s limitations. The program lending modality has limitations in its ability to bring about structural changes. To ensure a program’s successful implementation, adequate attention must be given to implementability of the policy conditions. Under the PSERP, that limitation was overcome by focusing on specific actions rather than institutional capacities. The PSERP required actions such as corporatization and improving corporate governance compliance, for instance, and in order to achieve these objectives the program also ensured that needed changes were made in relevant statutes covering corporate governance rules and laws.

(vii) Sustaining reforms. Economic and public service management reforms initiated attitudinal changes toward accountability, but they fell short of reaching a critical mass in many cases. Moreover, assumptions regarding private sector participation need to be more realistic and reviewed regularly. Finally, reform is a medium- to long-term effort, and thus it needs continuous support from ADB.

42. Key issues are as follow:

(i) The government has not yet funded the DISCOs’ pension liabilities despite the budgetary allocation of PRs15 billion made during FY2018. With the new IMF Program in place, it is expected to do so by June 2020.

(ii) The privatization process was slow due to political pressure for preserving the status quo at many PSEs and to negative public sentiments.

(iii) The government is in the process to fully corporatize the postal life insurance

(iv) Progress is slow toward full operationalization of a dedicated PPP unit within Pakistan Railways.

(v) IFRS-based financial statements have yet to be completed in some PSEs. B. Recommendations 43. Key recommendations include the following:

(i) Funding of pension liabilities. The government should fully fund the liabilities of the DISCOs from the budgetary allocation of PRs15 billion made during FY2018 and through additional resources.

(ii) Private Sector Development. The government has recognized the role of the private sector in promoting economic growth and creating employment opportunities. It made efforts to reduce the dominance of the public sector through public enterprise reforms. Unfortunately, as in many other developing countries, those efforts had relatively little near-term impact. Meaningful and sustained private sector development will hinge on the quality of governance. The government will need to maintain political and macroeconomic stability; enforce rules, regulations, and contracts; and provide support services in order for the private sector to flourish.

(iii) Impartiality of the government. The government needs to be impartial in order to enforce rules, regulations, and contracts. It may wish to review (and possibly disallow) the current practice of having ministers and heads of ministries sit on PSE boards of directors as board and/or committee chairs.

(iv) Review of privatization and corporatization strategy. The government may also wish to review its privatization and corporatization strategy. The main issues related to PSE reforms are whether corporatization and privatization are feasible, how much funding they will require, and whether the reforms will lead to improved business performance. The government will need to conduct rigorous cost–benefit

12

analysis and social and environmental impact assessment for privatization proposals. Useful guidance could be obtained from the auditors’ reports of previous corporatizations and privatizations. In addition, alternative ways to improve the performance of PSEs could be explored. Type of structure or ownership arrangements may not be the most crucial issue to address at this stage. Appointment of professional board members and management personnel may be the first step for PSEs to improve business performance. In addition, the government needs to be consistent in its policy implementation and in expediting the privatization process as per an approved plan. It also needs to embark on the restructuring of PSEs.

(v) Settlement of labor issues. For a successful privatization process, the Privatization Commission must increase its efforts to address labor issues and implement more proactively the communication strategy already approved.

(vi) Implementation of accrual-based accounting. Pakistan Railways must stay the course in implementing the accrual-based accounting system and preparing its first IFRS-based financial statements.

(vii) Conditionality framework. The government can put in place systems and procedures comprising a credible conditionality framework for providing fiscal support to PSEs. Profitability targets, social functions, and other conditionalities to ensure compliance with CGR can be established to support the fiscal resource base.

(viii) Future monitoring. ADB should continue monitoring the government’s progress in implementing under this program reforms having long-term impact, especially funding of pension liabilities; corporate governance reforms; and public awareness about PSE reforms, including restructuring and privatization.

(ix) Timing of the project performance evaluation report. Though the overall existing compliance and implementation status is satisfactory and ADB could undertake the performance evaluation during the latter part of FY2020, one program cannot be expected to bring revolutionary reforms and it may be more realistic to evaluate performance of the program after the reforms and impact of other programs start to materialize. ADB is currently supporting the government on various reform programs and with project lending that will further strengthen the reforms initiated under the PSERP.

44. Further action or follow-up. To ensure successful implementation of the reform program, the Privatization Commission and Pakistan Railways are required to submit quarterly progress reports to ADB explaining the implementation progress of all policy actions, regularly upload PSEs’ annual financial performance reports to the Finance Division website, and list PSEs that are noncompliant with CGR on the SECP website. Governance and PSE reforms remain priorities on the development agenda, as reflected in Pakistan Vision 2025, and under all recently concluded reform programs conducted with the assistance of development partners. Given Pakistan’s deteriorating foreign exchange reserves and rising fiscal deficit, PSE reforms to reduce fiscal transfers will be a high priority. As the PSERP has sensitized the government to the importance of the governance reforms, ADB should remain engaged in public sector reforms over the medium term.

Appendix 1 13

DESIGN AND MONITORING FRAMEWORK

Design Summary Performance Indicators

and Targets Program Achievements

Impact Net fiscal transfers to PSEs from the federal budget reduced

Subsidies and grants outlay to GDP ratio to be reduced

Being Achieved Fiscal transfers to PSEs under subsidies and grants reduced from 0.8% of GDP for FY 2014-2015 to 0.4% of GDP for FY 2017-2018

Outcome PSE performance improved

a. Annual net profit of federal PSEs improved by 20% by FY2018 (FY2014 baseline: PRs199 billion)

Being Achieved PSEs posted a net loss of PRs191.5 billion for the FY 2016-2017 due to delay in implementation of desired reforms in PSEs. As the latest figures for FY 2017-2018 are not available, therefore the achievement status is updated based on latest available figures. Overall losses have decreased and most of the PSEs have performed well. Dividend income showed moderate increase to PRs91.5 billion for FY 2016-2017.

b. Dividend income from federal PSEs improved by at least 20% by FY2018 (FY2015 baseline: PRs83 billion)

Outputs 1. Policies to address labor issues and communication strategy introduced, and costs and benefits assessed

1a. MOF (i) continued to monitor full compliance with all policy actions through regular consultations with relevant departments and ministries, and progress achieved in meeting critical reform targets; and (ii) completed detailed assessment on the costs incurred in carrying out the programmatic approach (2016 baseline: monitoring began in July 2016)

Achieved MOF status report on monitoring process and detailed assessment on the costs incurred in carrying out the program.

1b. Three nationwide public awareness campaigns by the Privatization Commission verified (2016 baseline: ongoing)

Privatization Commission submitted a detailed status report explaining its multipronged approach to increase public awareness on the benefits of PSE reforms and privatization. This includes direct outreach to key stakeholders using various platforms such as international and national roadshows, seminars, stakeholder briefings, and proactive media engagement through the use of traditional and digital communication. It has also provided details on the privatization process in its yearbook FY 2017-2018.

14 Appendix 1



1c. (i) The Board of Directors of eight DISCOs approved the Retirement Cost Funds as separate institutions, with boards of trustees and prudent investment policies; and (ii) MOF made a PRs15 billion budgetary allocation for PSE reforms (power sector) in the FY2018 annual budget (2016 baseline: none)

The eight DISCOs have registered their trust deeds with the relevant authorities and are following prudent GOP approved investment policies. An amount of PRs15 billion was allocated in the Federal Budget for power sector reforms.

2. Financial transparency, monitoring, and corporate governance in PSEs improved

2a. MOF approved the establishment of an IT-based PSE performance monitoring system and approved the IT systems architecture and implementation plan (2016 baseline: NA)

Achieved MOF provided a report for the establishment of an IT-based performance monitoring system and approved the IT system architecture.

2b. Finance Division published financial performance report for all federal government PSEs for FY2015 on its website with gender-disaggregated information on the members of the board of directors (2016 Baseline: available for FY2014)

Financial performance report for all the Federal Government PSEs for FY 2016-2017 has been uploaded on Finance Division website.

2c. At least 50% of PSEs statement of compliance with CGR for FY2016 and the audit opinions thereon submitted to SECP (2016 baseline: 37%)

59% of PSEs have submitted statement of compliance with CGR and the audit opinion thereon for the FY 2017-2018. SECP is regularly submitting a quarterly statement to Finance Division besides publishing the name of noncompliant PSEs on SECP website. SECP submitted quarterly performance report to Finance Division for the quarter ended 30 June 2019. SECP uploaded name of noncompliant PSEs on its website based on the status as of 30 June 2019.

Appendix 1 15



2d. SECP submitted all the Corporate Governance Rules quarterly reports of noncompliance to the Finance Division (2016 baseline: NA)

2e. SECP published the names of PSEs that are noncompliant with the Corporate Governance Rules on the SECP website (2016 baseline: NA) 2f. (i) MOF issued a notification subjecting all federal PSEs to the Corporate Governance Rules; (ii) the Senate Standing Committee on Finance approved the change in the Companies Bill 2017 making it mandatory that all boards of public interest companies have at least one female member; and (iii) MOF prepared a list of PSEs with at least one female board member, by June 2018 (2016 baseline: NA)

Through a notification MOF has made it mandatory for all PSEs to follow the corporate governance rules (to the extent they are not in conflict with their respective status and rules framed thereunder). MOF is in the process of collecting data from PSEs regarding collection of data related to female Board members.

3. Restructuring and reform of selected PSEs initiated

3a. The government (i) completed restructuring of the House Building Finance Company through actions that include formulating the board, initiating a recovery drive for nonperforming loans, and simplifying loan disbursement procedures; (ii) issued invitations for expression of interest for acquisition of shares of SME Bank; and (iii) initiated the process of corporatization of Postal Life Insurance based on the approved guidelines (2016 baseline: NA)

Partly Achieved (i) Government submitted an action taken report on restructuring of HBFC that includes formulation of board, efficiency and capacity improvement, simplification of capacity improvement, recovery drive for nonperforming loans, provision of new resources and approval of new business plan; (ii) Government invited expression of interest for acquisition of 93.88% of shares in SME Bank Limited and has also issued expression of interest for appointment of Financial Advisor; and (iii) government initiated the process of corporatization of Postal Life Insurance in accordance with the roadmap approved by the Ministry of Communications and the process of hiring of consultants is under process

16 Appendix 1



3b. Pakistan Railways conducted a risk-based internal audit for FY2017 based on the approved guidelines (2016 baseline: NA) 3c. Ministry of Railways approved the key recommendations on departmental restructuring and workforce rationalization based on its interim report (2016 baseline: NA).

Ministry of Railways has issued guidelines for the implementation of the risk-based internal audit system and has taken necessary steps to strengthen the internal audit system and to conduct the audit based on risk-based method. 3rd and 4th biannual reports for the year 2017–2018 has been issued by Chief Internal Auditor. Key audit findings were approved by Secretary/Chairman Railways. MOR has submitted the interim report. The Committee on the departmental restructuring/workforce has submitted its report which is being reviewed by the Ministry of Railways. Final report and its key recommendations will be shared after approval. Given the sensitive nature of these recommendations, MOR has decided to move ahead with a consultative approach.

3d. Pakistan Railways (i) reconciled the database with the revenue authorities; and (ii) completed IT-based automation of its land database (2016 baseline: NA).

MOR has submitted the report on establishment of the land database and has completed the reconciliation process of land assets database with revenue authorities.

3e. Pakistan Railways (i) implemented the process of private participation in at least two railway services; and (ii) established and operationalized its PPP units in the Ministry of Railways, Islamabad under Deputy Director General (Commercial 1) and at the Pakistan Railways Headquarters in Lahore under the Assistant Commercial Manager (Contract) for awarding and managing commercialization of selected railways’ services. (2016 baseline: NA)

MOR has submitted the detailed report and while its PPP unit has been operationalized with interim arrangements, full-time dedicated staff is yet to be recruited from the private sector. The PPP unit has been established and operationalized. The Director General for Operations has been nominated as the focal point and the commercial section of the Operations Directorate tasked with overseeing the PPP unit as a stop-gap arrangement.

Appendix 1 17



3f. Pakistan Railways (i) commenced adoption of IFRS by updating the codes and manuals; and (ii) notified the date of finalization of its IFRS compliant annual audited financial statements for the financial year ending 30 June 2018. (2016 baseline: NA)

MOR has initiated the process for adoption of IFRS and submitted the implementation report providing the timelines for the completion of IFRS-based financial statements for FY 2017-2018. However, the IFRS-based financial statements for FY 2018 are not yet completed, and the exact status of preparation of IFRS-based financial statements is yet to be confirmed.

3g. Pakistan Railways (i) published all tenders on the Pakistan Railways website to improve transparency and competition, (ii) uploaded bid evaluation reports of all major procurement packages on the Pakistan Railways website with the approval of the Secretary of Railways, (iii) uploaded a consolidated annual procurement plan for all works and development projects on the websites of Pakistan Railways and Public Procurement Regulatory Authority, and (iv) reduced tender finalization time within the bid validity period (2016 baseline: NA)

MOR has initiated the process of transition to enterprise resource planning and has submitted the action taken report on procurement reforms. The bid evaluation report of all the major procurement packages is being uploaded on Pakistan Railways’ website. The last major procurement contract was signed on 7 June 2017 for the procurement of 20 (2000-2500 HP) diesel electric locomotives. Evaluation Report of the same was uploaded on Pakistan Railways’ website on 20 July 2017.

The tender documents for major procurements are being uploaded on the website. Recently, the tenders for the procurement/ manufacturing of 230 coaches and 820 high capacity wagons have been floated and the tender documents of the same have been uploaded on the website (www.pakrail.gov.pk) on 01.07.2019 (URL: http://www.pakrail.gov.pk/ PublicNotice.aspx)

CGR = Corporate Governance Rules, 2013, GDP = gross domestic product, GOP = Government of Pakistan, HBFC = House Building Finance Company, IFRS = International Financial Reporting Standard, IT = information technology, MOF = Ministry of Finance, MOR = Ministry of Railways, PPP = public–private partnership, PSE = public sector enterprise, SECP = Securities and Exchange Commission of Pakistan, SME Bank = Small and Medium Enterprises Bank.

http://www.pakrail.gov.pk/

http://www.pakrail.gov.pk/PublicNotice.aspx

http://www.pakrail.gov.pk/PublicNotice.aspx

18 Appendix 2

STATUS OF COMPLIANCE WITH LOAN COVENANTS

Covenant

Reference in Loan Agreement

Status of Compliance

In the carrying out of the Program, the Borrower shall perform, or cause to be performed, all obligations set forth in Schedule 4 to this Loan Agreement.

Section 4.01.

Complied With Borrower performed all obligations set forth in the Schedule 4 to this loan agreement

As part of the reports and information referred to in Section 6.05 of the Loan Regulations, the Borrower shall furnish, or cause to be furnished, to ADB all such reports and information as ADB shall reasonably request concerning (a) the Counterpart Funds and the use thereof; and (b) the implementation of the Program, including the accomplishment of the targets and carrying out of the actions set out in the Policy Letter.

Section 4.02.

Complied With Borrower furnished to ADB all such reports as required to accomplish the targets and carrying out of the actions set out in the policy letter

Implementation Arrangements 1. The Borrower shall, through MOF, provide overall oversight for the Programmatic Approach and regularly monitor progress of the Programmatic Approach. 2. MOF, through its Finance Division, shall be the Program Executing Agency. MOF, MOR, Pakistan Railways, Privatisation Commission and SECP shall be the Program Implementing Agencies and shall be responsible for the implementation of their respective components under the Programmatic Approach. The Program management unit established under the Finance Division of MOF shall assist the Program Implementing Agencies and shall coordinate the implementation of the Programmatic Approach. 3. The Borrower shall ensure that the Program Executing Agency and the Program Implementing Agencies are adequately staffed and provided with the necessary financial, technical and other resources to perform their respective functions and responsibilities under the Programmatic Approach.

Schedule 4

Schedule 4

Schedule 4

Complied With MOF regularly monitor the progress of the programmatic approach Complied With Implementation arrangement were made as per covenant Complied With EA and IAs were adequately staffed

Appendix 2 19

Covenant



Policy Actions and Dialogue 4. The Borrower shall ensure that all policy actions adopted under the Program, as set forth in the Policy Letter and the Policy Matrix, continue to be in effect for the duration of the Programmatic Approach and thereafter. 5. The Borrower shall keep ADB informed of policy discussions with other multilateral and bilateral aid agencies that may have adverse implications for the implementation of the Program and shall provide ADB with an opportunity to comment on any resulting policy proposals within 30 days of receipt by ADB of such proposals. The Borrower shall take into account ADB’s views before finalizing and implementing any such proposal. Financing for PSE Pension Reforms 6. The Borrower shall ensure that for its fiscal year ending 30 June 2018, an amount of Pakistan rupees fifteen billion (PRs15,000,000,000) is available to the relevant PSEs for the power sector pension reforms envisaged under the Program. Use of Counterpart Funds 7. The Borrower shall ensure that the Counterpart Funds are used to finance the implementation of certain programs and activities consistent with the objectives of the Program. Governance and Anticorruption 8. The Borrower, the Program Executing Agency, and the Program Implementing Agencies shall: (a) comply with ADB's Anticorruption Policy (1998, as amended to date) and acknowledge that ADB reserves the right to investigate directly, or through its agents, any alleged corrupt, fraudulent, collusive or coercive practice relating to the Program; and (b) cooperate with any such investigation and extend all necessary assistance for satisfactory completion of such investigation.

Schedule 4

Schedule 4

Schedule 4

Schedule 4

Schedule 4

Complied with All policy actions under the policy matrix remained in effect for the duration of the programmatic approach and will remain thereafter Not Applicable Complied With MOF made budgetary allocations (FY 2017-2018) Not Applicable (no government counterpart funding applied) Complied With No allegations of corruption were raised and no investigations conducted

20 Appendix 2

Covenant



Monitoring and Review 9. The Borrower shall use its consultative mechanisms to facilitate dialogue among relevant stakeholders to evaluate benefits of all policy actions adopted under the Programmatic Approach and to identify future areas of PSE reforms.

Schedule 4

Complied With Consultative mechanism used by Borrower with all the stakeholders to evaluate the benefits of the program

ADB = Asian Development Bank, EA = executing agency, IA = implementing agency, MOF = Ministry of Finance, MOR = Ministry of Railways, PSE = public sector enterprises, SECP = Securities and Exchange Commission of Pakistan.

Appendix 3 21

STATUS OF COMPLIANCE WITH POLICY ACTIONS

Policy Action Status of Compliance and Source Documents

1. MOF (i) continued to monitor, through regular consultations with relevant departments and ministries, progress achieved in accomplishing critical reform targets; and (ii) completed detailed assessment on the costs incurred in carrying out the Programmatic Approach. (Documents required: MOF reports on progress on PSE reforms and costs incurred).

Completely Complied With: MOF issued the report on progress achieved in accomplishing the critical PSE reforms covering detailed assessments on the cost incurred in carrying out the programmatic approach. (MOF Report and Letter)

2. Privatization Commission completed three nationwide public awareness campaigns, highlighting the costs and benefits of the PSE reforms. (Documents required: Privatization Commission’s report on public awareness activities).

Completely Complied With: Privatization Commission issued the public awareness activities report highlighting the costs and benefits of the PSEs’ reforms. (PC Report and Letter)

3. (i) Eight DISCOs established/registered separate Trusts for their Retirement Cost Funds with independent board of trustees and prudent investment policies; and (ii) MOF allocated Rs15 billion in the annual budget for FY 2018 for the PSE reforms in the power sector. (Documents required: A report on the Retirement Cost Funds and annual budget document for FY 2018).

Completely Complied With: Each DISCO established the separate trust for their retirement cost fund with independent board of trustees and prudent investment policies. MOF also allocated PRs15 billion in annual budget for FY 2018 for PSE reforms in power sector. (Trust Deeds and GOP Federal Annual Budget for FY 2017-2018)

4. MOF approved the establishment of an IT based PSE performance monitoring system, covering the system’s architecture; implementation plan; data collection and authentication plan; human resource requirements; and training requirements for timely and regular assessment of financial, operational and management performance of the PSEs. (Documents required: MOF approval letter and the approved report on the structure of the IT systems and the implementation plan).

Completely Complied With: MOF approved report on the structure of the IT systems and the implementation plan. (MOF Report and Letter)

5. MOF (i) published the financial performance report of all federal PSEs for FY2015 on its website with gender disaggregated information on the members of the Board of Directors; and (ii) submitted a progress report on the preparation of the financial performance report of all federal PSEs for FY2016. (Documents required: (i) financial performance report of all federal PSEs for FY2015 and website link to such report, and (ii) progress report on the preparation of the financial performance report of all federal PSEs for FY2016).

Completely Complied With MOF (i) published the financial performance report of all federal PSEs for FY 2014-2015 on its website with gender disaggregated information on the members of the Board of Directors; and (ii) submitted a progress report on the preparation of the financial performance report of all federal PSEs for FY 2015-2016. MOF has published the financial performance report of all the federal PSEs for FY 2016-2017. (MOF website link and status report)

22 Appendix 3


6. At least 50% of all federal PSEs submitted to SECP statement of compliance with CGR for FY2016 together with the audit opinions thereon. (Document required: Compliance reports on CGR).

Completely Complied With 59% of all the federal PSEs submitted the statement of compliance with CGR for FY 2015-2016 together with the audit opinion. For FY 2016-2017, 61% of the PSEs filed with SECP the statement of compliance with Public Sector Companies Corporate Governance Rules, 2013. For FY 2017–2018, 59% of the PSEs filed with SECP the statement of compliance with Public Sector Companies Corporate Governance Rules, 2013. (SECP letter)

7. SECP submitted all quarterly reports of non-compliance of CGR to MOF. (Document required: Quarterly reports).

Completely Complied With SECP submitted all quarterly reports of noncompliance of CGR to MOF. (SECP report)

8. SECP published the names of the federal PSEs that are non-compliant with CGR on SECP’s website (Document required: List of non-compliant PSEs and the relevant website link).

Completely Complied With SECP published the names of the federal PSEs that are noncompliant with CGR on SECP’s website. (SECP website link)

9. (i) MOF issued a notification subjecting all federal PSEs to CGR to include PSEs which are not registered under the Companies Ordinance, 1984; (ii) the government amended Rule 12 of the CGR to empower the nomination committees of PSEs to evaluate candidates on the Board, including the candidates recommended by the government; (iii) the government amended Rule 8 of the CGR to require each director of a PSE to sign a performance contract at the time of appointment and to annually evaluate the performance of directors, including the chairman and chief executive officer of a PSE; and (iv) The Senate Standing Committee on Finance approved the change in the Companies Bill 2017 to have mandatory presence of a female member on the boards of public interest companies. (Documents required: (i) Notification from MOF to include all PSEs under CGR, (ii) approved amendments to CGR, and (iv) copy of amended Companies Bill 2017 highlighting the proposed change under cover of a letter from SECP).

Completely Complied With (i) MOF issued a notification subjecting all federal PSEs to CGR to include PSEs which are not registered under the Companies Ordinance, 1984; (ii) the government amended Rule 12 of the CGR to empower the nomination committees of PSEs to evaluate candidates on the Board, including the candidates recommended by the government; (iii) the government amended Rule 8 of the CGR to require each director of a PSE to sign a performance contract at the time of appointment and to annually evaluate the performance of directors, including the chairman and chief executive officer of a PSE; and (iv) The Senate Standing Committee on Finance approved the change in the Companies Act, 2017 to have mandatory presence of a female member on the boards of public interest companies. (MOF Notification, SECP SRO for amendment in CG Rules and Companies Act, 2017)

Appendix 3 23


10. The government: (i) completed restructuring of House Building Finance Corporation, (ii) issued invitation for Expression of Interest for acquisition of 93.88% shares of SME Bank Ltd.; and (iii) the government initiated the process of corporatization of Postal Life Insurance in accordance with the roadmap approved by the Ministry of Communications. (Documents required: (i) copy of the invitation for the acquisition of shares of the SME Bank Ltd., (ii) action-taken report on restructuring of House Building Finance Corporation and status of corporatization of Postal Life Insurance).

Completely Complied With Government (i) submitted an action taken report on restructuring of HBFC that includes formulation of board, efficiency and capacity improvement, simplification of capacity improvement, recovery drive for nonperforming loans, provision of new resources and approval of new business plan; (ii) invited expression of interest for acquisition of 93.88% of shares of SME Bank Limited; and (iii) initiated the process of corporatization of Postal Life Insurance in accordance with the roadmap approved by the Ministry of Communications. (Action taken reports for HBFC and Postal Life Insurance, and Expression of Interest for inviting acquisition of shares of SME Bank Limited)

11. Pakistan Railways: (i) prepared and approved the risk-based internal audit guidelines; and (ii) conducted the risk-based internal audit for FY2017 in accordance with such guidelines. (Document required: Action-taken report by Pakistan Railways’ internal audit department).

Completely Complied With Ministry of Railways has issued guidelines for the implementation of the risk-based internal audit system and has taken necessary steps to strengthen the internal audit system and to conduct the audit based on risk-based method. (MOR letters)

12. MOR approved the key recommendations on departmental restructuring and workforce rationalization based on its interim report. (Documents required: (i) Interim report (ii) Approval of key recommendations of the interim report by MOR).

Completely Complied With MOR has submitted the interim report. It is assumed that the report includes the approved recommendations. (MOR Interim Report)

13. Pakistan Railways: (i) reconciled the database with the land revenue authorities; and (ii) completed IT based automation of its land database. (Documents required: Report on establishment of land asset database including reconciliation and automation of the database).

Completely Complied With MOR has submitted the report on establishment of the land database and reconciliation process. (MOR Report)

14. Pakistan Railways: (i) implemented the process of private participation in, at least, two railway services; and (ii) established and operationalized its PPP unit. (Document required: Detailed report by Pakistan Railways on private participation and PPP unit activities).

Completely Complied With MOR has submitted the detailed report on Pakistan Railways private participation and PPP Unit activities. (Report by Pakistan Railways)

24 Appendix 3


15. Pakistan Railways: (i) commenced adoption of IFRS; and (ii) notified the date of finalization of its IFRS compliant annual audited financial statements for the financial year ending 30 June 2018. (Documents required: Implementation report and the notification).

Completely Complied With MOR has provided the detailed report to substantiate the compliance with policy action. The preparation of IFRS-based financial statements for FY 2017-2018 is under process. (MOR Report)

16. Pakistan Railways commenced the process of transition to Enterprise Resource Planning System in a phased manner for integration of the procurement system for improvement of the internal controls, and: (i) floated all tenders on the Pakistan Railways website to improve transparency and competition, (ii) uploaded bid evaluation reports of all major procurement packages on the Pakistan Railways website with the approval of the Secretary of Railways, (iii) prepared consolidated Annual Procurement Plan for all works and development projects and uploaded on the website of Pakistan Railways and Public Procurement Regulatory Authority, and (iv) reduced the tender finalization time within the bid validity period to improve efficiency in the procurement process. (Document required: Action-taken report on implementation of procurement reforms).

Completely Complied With MOR has submitted the action taken report on procurement activities to substantiate the compliance with policy actions. (MOR Report)

CGR = Corporate Governance Rules, 2013, GOP = Government of Pakistan, IFRS = International Financial Reporting Standards, IT = information technology, MOF = Ministry of Finance, MOR = Ministry of Railways, PPP = public–private partnerships, PSE = public sector enterprise, SECP = Securities and Exchange Commission of Pakistan, SME Bank = Small and Medium Enterprises Bank.