1. Non-financial public companies in Afghanistan consist of around 35 State Owned Enterprises (SOEs) and 15 State-Owned Corporations (SOCs). The SOEs are set up under the State-Owned Enterprise (Tassady) Law of November 2005, and operate with 100 percent state ownership under the control of the relevant line ministry.2 The SOCs, on the other hand, are set up under the Corporations and Limited Liability Companies Law, and operate under varying degree of state ownership and control depending on the level of state shareholding. The state shares of SOCs are held by the relevant line ministries. The SOCs report to their board of directors and a
representative of the Ministry of Finance (MoF) has a membership in the majority of SOCs’ board.
2. A large share of these SOE and SOCs were either unprofitable or made little profit in 2014 (Table 1). The total profits of the nonfinancial public companies, for which data are available were around Af 2.5billion or 2.5 percent of total government revenues in 2014.2 Total profits have been declining nominally for the past 3 years. Enterprises operating in the energy and transportation sectors, including Shamal Coal, Afghan Gas, Mazar Electricity, and Millie Bus, have employed a significant part of the workforce in the public enterprise sector, and those in the energy sector have accounted for most of the profits earned, with 80 percent of all profits coming from one SOE:
Shamal Coal. Ariana Airlines, however, have been running deficits for the past 3 years, and together with the National Insurance Company, experienced the largest losses in 2014.3
3. Effective financial and operational oversight of SOEs and SOCs could contribute to strengthening public finances and moving toward fiscal sustainability. While SOEs and SOCs are a source of non-tax domestic revenue—with the former yielding less than 0.1 percent of GDP in dividends annually between 2012-2014, the amount of government support provided to the
sector—in the form of loan guarantees, concessions, tax expenditures, subsidies, and
recapitalizations—is poorly understood or accounted for. As low dividends to government arising from poor financial management in these entities, and implicit and explicit government obligations to assist them in case of failure could create large budgetary costs, the fiscal risks arising from SOEs and SOCs operations should be identified in a timely manner and monitored closely.
4. Currently financial oversight of SOEs is undertaken by the SOE department within the MoF, but needs strengthening. This oversight task includes (i) the approval of an annual financial
1 Prepared by Elif Ture (FAD).
2 The MoF owns the SOEs and has a representative on the SOE’s Supreme Council (Board) serving as the vice chairman, while the minister or the chief of the agency, which supervises the enterprise, chairs the Supreme Council.
2 The Central Statistics Organization (CSO) publishes quarterly revenue and expenditure data on SOEs and SOCs that submit their financial statements to the MoF regularly. CSO currently publishes quarterly data on 38 of 50 SOEs and SOCs.
3 Another loss making SOC, which is not included in the CSO reports, is Afghan Water Supply and Sewerage, which has been running deficits of around Af250mn annually between 2011 and 2013 according to the records of MoF Department of SOCEs.
plan submitted by the SOE in the first quarter of the fiscal year; and (ii) the review of subsequent quarterly reports submitted to show the progress on implementing the approved plan. However, the oversight of fiscal risks is hampered by the lack of accounting capacity within SOEs, which means they are not able to report their financial operations and positions adequately and in a timely way, and the lack of analytical capacity within the SOE department to monitor the reports effectively.4 Although, the SOE Law requires annual external audits of SOE financial statements, capacity constraints have prevented undertaking such audits being conducted regularly.
5. There is limited financial oversight over SOCs. In 2013, the SOE Department established a unit for channeling the instructions of MoF to SOCs and monitoring and assessing the financial performance of SOCs ex-post. After the creation of this new unit, the name of the SOE department was changed to the SOCE department; however, until the SOCs law is amended, it does not have a supervisory mandate or enforcement authority.
6. The government proposed amendments to the laws governing SOE and SOCs that aim to unify and strengthen the state ownership and oversight function within the MoF. While the amendment to the SOE Law will enhance the MoF’s role in financial oversight of SOEs by
establishing a robust framework of monitoring their performance, the amendment to the
Companies Law aims to bring the SOCs under MoF oversight officially.5 The draft amendments to SOEs Law and Corporations Law have been sent to Ministry of Justice for processing in 2013, and no progress has been achieved since then.
7. Staff recommends the amendments to the SOE and SOC Laws, which were committed to as part of the previous ECF-supported Program, be passed promptly. After enactment of the amendments and transfer of legal ownership to the MoF of all state shares in SOCEs,6 and following the 2012-2013 FAD-led PFM TA recommendations:
i) the MoF should review the capacity of the SOE department to assess needed staffing and seek technical assistance, including through IMF, to improve the capacity for operational and financial oversight of the SOCEs by ensuring regular external audits, preparing quarterly and annual analytical reports on financial performance and position of SOCEs, and assessing their fiscal impact and risks within the medium-term fiscal framework, with particular attention to identifying the financial flows between the MoF and SOCEs, the latter’s quasi-fiscal activities and associated contingent liabilities;
4 See Afghanistan Public Financial Management and Accountability Assessment, August 2013, http://treasury.gov.af/Content/files/PEFA%20Afghanistan%202013.pdf.
5 The proposed amendment to the Companies Law does not have an explicit requirement for SOCs to submit their annual financial plan and quarterly progress reports to the MoF. However, these plans and reports are required to be submitted to the Board of Directors of the SOC, and the Minister of Finance as the majority shareholder can bring the SOC under MoF oversight (See “Public Financial Management Reforms: Next Steps,” June 2013 IMF TA report on Afghanistan).
6 Recently some ministries have thought more shares in SOCEs, for example the Ministry of Agriculture, Irrigation and Livestock asked for approval to increase its holdings in Baghlan Sugar Company and Nangarhar Canal.
ii) the board of directors of the SOCEs should review the Articles of their entities to strengthen the merit based hiring practices and capacity development operations to contribute to the strengthening of fiscal performance and service delivery of SOCEs.
Table 1. State Owned Enterprise and Corporations, Employment and Profits
Name Ministry Type GoA Share (%) Employees (#) Year 1/
2012 2013 2014
23 Afghan Textiles Co. Ministry of Commerce and Industries SOC 90 … … … … …
24 Aftanto Ministry of Commerce and Industries SOC 30 … … … … …
25 New Baghlan Sugar Ministry of Commerce and Industries SOC 100 … … … … …
26 Prisons Industries Ministry of Internal Affairs SOE 100 26 2012 … … …
27 Sher khan Port Ministry of Commerce and Industries SOE 100 157 2014 … … …
Service sector 917 423 179
44 Afghan Telecom Ministry of Telecommunication and IT SOC 100 … … … … …
45 Afghan Water Supply and Sewerage Ministry of Urban Development SOC 100 … … … … …
46 Afghan Wireless Telecom (AWCC) Ministry of Telecommunication and IT SOC 20 … … … … …
47 Afghanistan Electricity Co. (DABS) Ministry of Energy and Water SOC 100 … … … … …
48 Esteras (Heratan Port) Ministry of Commerce and Industries SOC 51 … … … … …
49 Intercontinental Hotel Ministry of Information and Culture SOC 100 … … … … …
50 Security Protection Force (APPF) Ministry of Internal Affairs SOE 100 … … … … …
Total 2,947 2,503 2,490
Source: Central Statistics Organization (CSO), Ministry of Finance State Owned Corporations and Enterprises (SOCE) Department.
1/ Solar year is used, e.g. 2012 refers to March 22nd, 2012 - March 21st, 2013.
2/ Profit data is from CSO, and number of employees and other data are from SOCE Department. Dotted cells indicate data is not available or comparable.
Profit (in million Afs) 2/
