Govt to overhaul nepotism-hit Fis

Finance minister to receive briefings on operations of these firms today

ISLAMABAD:

The government has decided to revamp bilateral development financial institutions, which have become breeding grounds for nepotism due to the appointment of favoured bureaucrats to their boards. These board members receive up to $5,000 (Rs1.4 million) per meeting in fees.

Instead of focusing on their primary role of lending to the industry and promoting foreign investment, these financial institutions have been heavily investing in government debt, using loans from the State Bank of Pakistan (SBP). These boards, often filled with individuals lacking relevant expertise, have overlooked violations of the Articles of Association.

Finance Minister Muhammad Aurangzeb has decided to restructure these companies and their boards. He will begin receiving briefings from today (Thursday) on the operations of these firms, which were established in partnership with China, Saudi Arabia, Iran, Oman, Libya, Kuwait, and Brunei.

The management of the Saudi-Pak Industrial and Agricultural Investment Company and the Pak-Brunei Investment Company are scheduled to present their investment mandates today. They will explain their rationale for investing in government debt rather than lending to industries.

Official statistics show that, as of December last year, these companies invested Rs1.9 trillion in government debt, after borrowing nearly Rs2 trillion from the central bank. In 2021, their investment in government debt stood at only Rs338 billion. However, in the following year, the SBP allowed these institutions to participate in Open Market Operations, undermining the International Monetary Fund's objective of halting direct lending to the federal government by the SBP.

Seven financial institutions were established with equity investments from regional countries, including the Pak-Kuwait Investment Company, Pak-China Investment Company, Pak-Brunei Investment Company, Pak-Oman Investment Company, Pak-Libya Investment Company, Pak-Iran Investment Company, and the Saudi-Pak Industrial Agricultural Investment Company.

These development financial institutions are intended to implement the government's foreign development policies and promote industrial growth. However, according to the SBP, nearly all fresh investments from these companies have gone into government securities, growing by 72.4% to Rs1.9 trillion last year. In contrast, loans to the private sector saw a stagnant growth rate of just 0.1% in 2023.

The SBP's Financial Stability Review stated that the expansion in the asset base of these companies was primarily driven by investments, financed through borrowing. Their aggressive participation in Open Market Operations facilitated these large investments.

A finance ministry official indicated that the government had turned a blind eye to the financial affairs of these institutions, as their boards were used to accommodate favoured politicians and bureaucrats.

These companies pay board members between $3,500 and $5,000 for each board or committee meeting, translating to nearly Rs1 million to Rs1.4 million. According to the websites of these companies, retired bureaucrats continue to hold positions on these boards, enjoying the perks, despite having left the finance ministry.

The additional secretaries at the finance ministry have divided the boards of these development financial institutions among themselves, irrespective of their qualifications. To curb this trend, the federal cabinet decided in June that bureaucrats cannot retain more than Rs1 million per annum in board fees. Any surplus must be surrendered to the national treasury. However, this rule does not apply to retired bureaucrats, who continue to receive substantial board fees.

Several board positions remain vacant, and the Ministry of Finance has been criticised for its poor track record in filling them. The ministry has also been slow to act against a senior executive of the Export-Import Bank, who allegedly tampered with records.

A senior official remarked that the strong connections among bureaucrats have led to nepotism in the appointment of board members. This, he said, is why former bureaucrats continue to hold these positions even after retirement.

On Wednesday, the Senate Standing Committee on Finance directed the finance ministry to submit details of vacant positions and the names of directors at these development financial institutions.