How Pakistan’s Public Service Obligations Framework Improves Service Delivery

A diagnostic assessment of the SOEs conducted in 2020 found that a major problem was the requirement that commercial SOEs undertake non-commercial activities, such as providing goods and services to remote areas, without adequate compensation. These activities—known as public service obligations—provide social benefits, but they also impose financial costs on SOEs that are meant to be operating on a financially sustainable basis.

If SOEs are not adequately compensated for delivering these services, their profitability declines, which adversely impacts cash flow. Over time, they will run out of financial resources to maintain assets such as roads, pay suppliers, or invest in new infrastructure, which erodes service quality and public confidence. In Pakistan, this pattern has contributed to mounting financial stress, including the accumulation of circular debt, as SOEs have increasingly turned to government to provide financial relief.

Unfunded public service obligations are major contributors to the financial and operational difficulties currently faced by the National Highway Authority and Pakistan Railways. As losses accumulate, the fiscal burden ultimately shifts to the government, which must repeatedly bail out the SOEs. In effect, unfunded non-commercial activities result in increased fiscal exposure for the government, and ultimately, increases pressure on the national budget.

A formal public service obligation framework is crucial to break the cycle of recurring losses and financial strain. To support this shift, ADB assisted the government of Pakistan to enact the State-Owned Enterprises Governance and Operations Act 2023, which provides a clear legal process for the federal government to contract public service obligations with commercial SOEs through formal agreements.

The innovative law stops unfunded directives with enforceable contracts that clearly define the service to be delivered and the compensation to be paid. Establishing legal obligation for government payment ensures that public services are treated as funded commitments in the national budget rather than absorbed as hidden losses on SOE balance sheets.

Under the Act, a public service obligation is a public or social good or service provided by a commercial SOE under government direction, that is, as a result of government policy. It can also include directives to not provide a good or service that SOE would typically offer as part of its commercial activities. Examples include subsidized electricity tariffs, subsidized train fares, or to charge airfares below cost.

The federal government also cannot require commercial SOEs to undertake a public service obligation that conflicts with its primary objective under the Act to ensure that revenues cover costs.

The public service obligation framework features several key elements:

• Public service obligations must be fully costed, including a reasonable profit margin so that the SOE can remain commercially viable.
• Services must be contracted through a performance-based agreement to ensure that SOEs are paid for delivering exactly what the government requires.
• SOEs may undertake a public service obligation only if it aligns with its primary commercial mandate. This prevents the government from forcing a SOE into loss-making activities that undermine its core function.
• Government must fund public service obligations, ensuring that SOEs do not absorb unfunded losses and that the true fiscal cost of the services is reflected in the budget.
• SOEs have an incentive to provide public service obligations because the government becomes a valuable paying customer.
• The provision of public service obligations must be transparent and accountable, disclosed in audited annual accounts and in the Business Plan and Statements of Corporate Intent that are published on the websites of the SOEs and Central Monitoring Unit—the agency set up to monitor and report on SOE financial and non-financial performance.

Implementing a robust public service obligation framework is a win-win. 

• The government can clearly identify the true costs of the public goods it purchases from SOEs, enabling it to assess the cost and benefit of each service and ensure it is getting the best value for the money spent.
• The public sees the benefits the government is purchasing on their behalf. This transparency helps build a strong political narrative and clearly shows citizens what services are being subsidized and why.
• SOEs are also more willing to provide public service obligations because these support their commercial objectives. This strengthens financial stability, helps prioritize competing demands on scarce resources, and reduces the need for repeated government bailouts.
• A well-implemented framework can enable competitive tendering and support private sector growth. When public service obligations are well-costed, documented, and funded through performance-based contracts, the government can select the least-cost or highest-value provider, including private firms, ensuring competitive neutrality, expanding service delivery options, and supporting private sector participation.

^[1] IMF. 2022. Pakistan: Selected Issues; IMF. 2024. Pakistan: 2024 Article Iv Consultation And Request For an Extended Arrangement Under The Extended Fund Facility—Press Release; Staff Report; and Statement By The Executive Director for Pakistan. IMF Country Report No. 24/310.

Asian Development Bank. Pakistan: Supporting State-Owned Enterprise Corporate Governance and Performance.