The government collects taxes from private companies and then uses that money to award public contracts to state-owned and military-affiliated entities without open bidding. Those entities often cannot do the work themselves, so they subcontract it back to private firms at lower rates and worse terms. The private company that actually builds the road, writes the software or lays the fiber never gets the credit, the fair price or the project record it needs to grow. The taxpayer pays full price. The state entity keeps a margin for standing in the middle. The IMF wants this practice capped. Pakistan’s government has spent months trying to keep the door open. The fight is over one rule, Rule 32-F, and the country missed its own deadline to publish it.
Private companies pay corporate income tax, import duties and sales tax into the national exchequer. The state then uses part of that revenue to finance state-owned and defense-affiliated companies, awards some of those companies public contracts without open bidding, and allows work to return to private firms as subcontracts after those firms lost the chance to compete for the original award. The state is buyer, seller and referee, while the private sector finances the arrangement and then enters it on worse terms.
Federal and provincial governments have expanded hundreds of state-owned enterprises and defense-affiliated corporate entities while private companies carry high energy costs, expensive credit and a widening tax burden. Public procurement should give those firms a chance to compete on price and technical capacity, but an exemption introduced in 2021 gave the state a route around open bidding.
That route is Rule 42(f) of the Public Procurement Rules 2004, inserted through SRO 834(I)/2021 on June 28, 2021. Its proposed successor is Rule 32-F of the draft PPRA Rules 2026. Both provisions allow a public body to award a contract directly to another state entity under specified conditions.
The existing rule bars brokerage in explicit language. A state entity receiving a direct award must complete the work through its own resources without bringing in a private company as a partner, joint venture or subcontractor. Fresh reporting on the 2026 negotiations says state entities sometimes take work without bidding and then sublet it to private firms, which is the practice the IMF wants the new rule to stop.
When that happens, the taxpayer pays the head contract while the private contractor accepts the delivery risk without receiving the price, status or credentials of a principal award. The state entity stands between the treasury and the company doing the work.
The dispute now sits inside Pakistan’s IMF program. Reporting published by The Express Tribune on August 26, 2026, and recirculated on August 30, confirmed that Pakistan missed its June deadline for the PPRA Rules 2026 because the government and the Fund remained divided over direct contracts to state-owned enterprises. The Prime Minister’s Office has endorsed the wider draft and it is awaiting the Cabinet Committee for Disposal of Legislative Cases, but the government has not endorsed the final language of Rule 32-F.
The loophole inside the procurement law
Rule 20 of the Public Procurement Rules 2004 establishes open competitive bidding as the principal method for buying goods, services and works. Rule 42 permits alternatives for defined circumstances, including small purchases, emergencies and acquisitions available from only one supplier.
The federal government added Rule 42(f) in 2021. The provision created a route for “direct contracting with state-owned entities” for work and services described as time-sensitive and in the public interest. The receiving entity must be eligible to perform the assignment, complete it with its own resources and face limited competition when more than one state body is qualified. The procuring agency must also establish that the price is reasonable.
The own-resources condition is the safeguard. Direct contracting otherwise allows a public entity to secure an award without open competition and then buy the actual work from the market. The proposed 40 percent subcontracting limit in Rule 32-F would loosen the current textual ban on all private subcontracting while imposing a measurable ceiling.
The entities positioned to benefit include the Frontier Works Organization, National Logistics Corporation, National Radio and Telecommunication Corporation, Special Communications Organization and Telephone Industries of Pakistan. The Competition Commission of Pakistan has documented the larger competitive advantage enjoyed by public construction bodies such as the FWO and NLC, including exemptions and preferential treatment unavailable to private contractors.
The current public record does not provide a consolidated ledger showing how many Rule 42(f) contracts were subcontracted, what share of each project left the state entity, or what fee the entity retained. Without that ledger, the government can defend direct awards as isolated decisions while taxpayers cannot inspect the aggregate value, the subcontracting chain or the difference between the head contract and the price paid for delivery.
The transaction imposes three separate costs:
Taxpayers fund the head contract even when a private vendor performs the underlying work.
Private firms carry the execution risk on subcontracting terms and lose the primary credentials needed to compete for larger work at home and abroad.
State entities receive awards without proving that their price or technical offer could beat the market.
The exemption therefore rewards institutional access instead of capacity. Public bodies can describe a project as sovereign or strategic, place it outside ordinary competition and award it to another arm of the state, and yet the same private companies excluded at the first stage often return through the back door to complete the work.
SIFC’s power to relax the rules
Amendments to the Board of Investment Act gave the SIFC a mandate spanning defense, agriculture, infrastructure, logistics, minerals, information technology, telecommunications and energy. The law also created Article 10F, which allows the federal government, on an SIFC recommendation, to relax or exempt a project, transaction or agreement from a regulatory requirement.
The SIFC promised transaction speed. Pakistan was facing repeated balance-of-payments crises, stagnant investment and rising debt pressure, while the government sought state-to-state investment agreements with Saudi Arabia, the United Arab Emirates and Qatar. The council was designed to cut through regulatory delay and offer foreign governments a single center with the authority to advance major projects.
Article 10F and Rule 42(f) are separate provisions. The first governs regulatory relaxation for SIFC projects; the second governs direct procurement from state entities. Both give the executive a legal route around an ordinary rule when a transaction is labeled strategic, time-sensitive or in the public interest.
The IMF’s November 2025 Governance and Corruption Diagnostic responded to that discretion with two linked demands. It called for the elimination of procurement preferences, including those enjoyed by firms with state ownership, and required the SIFC to publish its first annual report with every facilitated investment, every tax, policy, regulatory or legislative concession, the reason for each concession and its estimated value. The Fund also demanded publication of information on the use of Article 10F.
Pakistan’s own economic-governance plan concedes that consolidated public information on SIFC concessions, fiscal effects and regulatory relaxations remains limited. The government has scheduled a draft SIFC annual report for December 2026 and a final report for March 2027, with publication due by June 2027. Until that report exists, no reader can trace the full transaction-level relationship between SIFC facilitation, Article 10F exemptions and contracts awarded to state entities.
The absence of that record protects a two-tier economy. State-backed companies have access to public capital, regulatory power and direct contracts, while private companies pay taxes and high utility tariffs before returning as subcontractors to deliver work they could not contest at the first stage. Foreign capital may enter through a government-to-government agreement and the SIFC may shorten the approval timetable, but speed does not establish value for money, technical competence or public benefit.
The private sector pays twice
The damage extends beyond the value of an individual contract. A company builds capacity by winning primary work, hiring skilled staff, buying equipment and using its completed projects to qualify for larger tenders. When state entities take the head contract and subcontract delivery, private firms lose the balance-sheet growth and project credentials that would allow them to expand.
Price discovery disappears at the same time. An open tender allows competing firms to state what they can deliver and at what cost. A negotiated direct award establishes no market comparison. The public cannot know whether it paid a fair price, whether another company offered better technology, or whether the selected entity possessed the capacity claimed on paper.
Information technology and software
Pakistan’s software companies sell enterprise systems, financial technology and cloud services to clients in North America, Europe and the Middle East. The same firms can be excluded from government work at home when a ministry directs an enterprise resource planning system, customs platform or surveillance project to a state communications company. One Karachi-based IT executive described the process:
“A local company can build mission-critical banking software in Riyadh or London, but cannot bid for an automation contract in Islamabad because the tender is pre-allocated to an SOE under an emergency security exemption. The state entity then calls three local software firms into a room and asks us to execute their project for a fraction of the cost under a white-label subcontract. The government pays top dollar, the state entity keeps a risk-free margin, and the private firm that actually writes the code receives neither the market price nor the primary project credentials needed to build corporate scale.”
The same frustration surfaced publicly in August after a Punjab Urban Land Systems Enhancement tender required products from vendors placed in Gartner’s 2026 “Leaders” quadrant. The condition excluded most Pakistani software houses before technical evaluation. In a LinkedIn post naming the tender, Naveed Latif asked:
“If we don’t trust our own software to secure our land records, why should the rest of the world trust it for their enterprises?”
The government pays for technical work, the private firm performs it and the state company owns the contract record. The public receives no competitive test of the price.
Construction and infrastructure
Private construction companies that helped build Pakistan’s roads increasingly face eligibility conditions suited to state or military-run engineering organizations. Once excluded from the principal contract, they return as equipment lessors, material suppliers and subcontractors.
That position denies them the revenue and credentials associated with primary delivery. A construction firm cannot build the balance sheet needed for international engineering work when its largest domestic projects appear under another organization’s name. The state entity grows through privileged access, while the company doing the work remains small enough to depend on the next subcontract.
The complaint predates Rule 42(f). A World Bank assessment of Pakistan’s construction industry, drawing on industry interviews, recorded the private contractor’s position in 2008:
“Parastatal firms such as NLC and FWO are directly given favorable contracts, but for private sector contractors, prices are negotiated to below estimated costs.”
Telecommunications and secure data
Private telecom operators have invested in spectrum, fiber backbones, towers and regulatory compliance. They then compete against state-backed organizations with government mandates and lower compliance costs.
Government data centers, secure intranets and provincial broadband projects can be assigned without open tenders. Private operators may then have to buy transit capacity from the same state entities. The government makes policy, regulates the market, chooses the contractor and competes for the revenue, and yet private license holders still carry the investment burden required to keep the wider network running.
On August 30, Pakistan Telecommunication Access Providers Association president Dr. Shahid Farooq carried that complaint directly to the finance, planning and information-technology ministers. The association represents 26 companies, including Cybernet, Nayatel, PTCL, Wateen and Multinet, and its letter alleged that SOEs were receiving direct projects before subcontracting work to preferred private vendors without competition. The letter said:
“The government is effectively dismantling the private sector that contributes to the national economy through taxes, job creation and innovation.”
The government’s promise to leave business
Prime Minister Shehbaz Sharif stated the official policy during his first address to the federal cabinet on March 11, 2024:
“The government is not meant to do businesses. Its responsibility is to provide all kinds of facilities to the private sector and protect the rights of consumers… We have to get out of doing business and leave business to the private sector.”
Planning and finance officials have repeated the same position at economic forums. The government says it wants to reduce the state’s commercial footprint, close loss-making enterprises and attract private investment.
The procurement record moves in the opposite direction. When officials drafted the PPRA Rules 2026, the government sought to carry Rule 42(f) into the new framework as Rule 32-F. Line ministries and sovereign deal-makers defended a contracting route that allows state companies to receive work without competing against the private businesses the prime minister says should lead the economy.
The contradiction reaches every company asked to invest, formalize and pay more for electricity while public contracts remain reserved for state-backed competitors. Pakistan asks private enterprise to finance the treasury and create jobs, and yet the treasury finances the entities that displace those companies from the market.
The IMF’s 40 percent limit
The IMF published its Governance and Corruption Diagnostic Assessment on November 20, 2025, after conducting the exercise at Pakistan’s request. The report described a heavily state-dominated economy with weak oversight and called for procurement rules that eliminate preferences for state-owned firms. Pakistan then committed to approve and notify the PPRA Rules 2026 by June as part of its economic-governance action plan under the $7 billion Extended Fund Facility.
Pakistan missed that deadline. As of August 31, the wider draft had been endorsed by the Prime Minister’s Office and was awaiting the Cabinet Committee for Disposal of Legislative Cases, but Rule 32-F remained unsettled. The finance ministry told the economic-governance committee that the rules would be approved at the committee’s next meeting; it gave no publication date.
The Cabinet Committee approved separate amendments to the PPRA Ordinance on August 27. That decision did not approve the PPRA Rules 2026 or settle Rule 32-F. The IMF’s April 2026 staff report sets a new end-September 2026 structural benchmark: Pakistan must amend the PPRA rules to eliminate SOE preferences in contracts awarded without competition, subject only to limited and reasonable exceptions.
A hard ceiling on subcontracting
The IMF proposed that direct contracts to state-owned entities be confined to exceptional work that is time-sensitive, scattered, remotely located and in the public interest. The recipient would normally have to perform the assignment through its own resources. Specialized project components could be outsourced, but subcontracting could not exceed 40 percent of the total work.
The government has accepted the 40 percent text while seeking a clause that would let the PPRA modify the rule’s financial thresholds. The dispute is whether that authority could also relax the subcontracting ceiling after the cabinet adopts it.
A material-deviation trigger
The IMF also wants subcontracting beyond the 40 percent ceiling classified as a “material deviation” within the rules governing collusive, coercive, corrupt, fraudulent and obstructive practices.
The classification would give the ceiling an enforcement route. Without it, a state entity could exceed the threshold and treat the breach as an internal administrative matter.
Public determinations through E-PADS
The Fund wants the head of the procuring agency to file a written determination of exceptional circumstances through E-PADS, together with an undertaking that every condition in the rule has been met. Both documents would be public.
The government’s draft requires only an undertaking on E-PADS. It omits the written determination and does not require public disclosure of that decision. The IMF version tells bidders, auditors and taxpayers who approved the exception and why, while the government version records compliance without exposing the justification.
The rules beyond Rule 32-F
The direct-contracting dispute has held up a draft that contains stricter controls elsewhere. The proposed rules would make competitive bidding mandatory for public purchases above Rs700,000 and place overall procurement responsibility on the federal secretary or head of each procuring agency.
The draft would require a third-party validation committee for bids worth between Rs500 million and Rs2 billion, followed by an external evaluation committee for bids above Rs2 billion. It would also allow ten-year blacklisting for corrupt or fraudulent practices and blacklisting of up to five years for false information.
New eligibility conditions would reach beyond the bidding company to its owners, directors and beneficial owners. Court proceedings that could lead to bankruptcy and certain past convictions could disqualify them from public procurement. These provisions tighten who may bid and who must answer for an award, but they do not settle whether a procuring agency can avoid that field by directing the contract to another arm of the state.
The clause that stopped the rules
The government accepted the language of the 40 percent threshold but proposed this additional sentence:
“All financial thresholds enumerated in this rule may be modified by the Authority from time to time.”
Fresh reporting says the government intends that language to make the 40 percent limit relaxable. The sentence itself refers to “financial thresholds,” not subcontracting limitations, which leaves the scope of the waiver legally contestable and makes the final text of Rule 32-F decisive.
The IMF and the government have not closed that disagreement. The June deadline passed without notification of the PPRA Rules 2026, and the draft remains before the Cabinet Committee for Disposal of Legislative Cases.
The missed benchmark is tied to a specific power. The IMF wants a binding limit on how much work a state entity can subcontract after receiving a direct award. Pakistan’s government wants the PPRA to retain room to modify thresholds after adoption, and yet the draft does not say clearly whether that room includes the 40 percent limit.
What open competition would change
Open competition would place state-owned and private companies under the same rules. If the FWO, NLC, NRTC, SCO, TIP or another state entity has better engineers, lower costs or stronger delivery capacity, an open tender gives it the chance to prove the claim. If a private firm offers a lower price or better technical proposal, the public receives the benefit. Competition tests both sides against the same terms.
A clean PPRA framework would require open bidding as the default, publish tenders and determinations through E-PADS, disclose beneficial ownership, and enforce the subcontracting ceiling without an executive waiver. Direct awards would remain confined to defined circumstances rather than becoming a standard route for strategic projects.
Such a framework would also protect the value of public money. Taxes collected from private companies could fund infrastructure, healthcare, education and security without financing an additional sovereign margin for an intermediary that does not deliver the work.
The prime minister has already stated that government should leave business to the private sector. Rule 32-F tests whether that promise applies when state entities must surrender their privileged route to public contracts. Pakistan missed the June deadline, and as of August 31 the government still had not published language that makes the 40 percent ceiling binding.
Rule 32-F remains unpublished.