The International Monetary Fund (IMF) has urged the Government of Pakistan to significantly restrict the practice of government agencies directly awarding contracts to state owned companies, calling for such arrangements to be permitted only under limited and clearly justified circumstances. The recommendation has become a major point of disagreement between Pakistan and the lender and has contributed to delays in the approval of the country’s new public procurement rules. The proposed rules are intended to replace the Public Procurement Rules 2004 and introduce updated requirements governing government procurement.
Under the action plan associated with the IMF’s Governance and Corruption Diagnostic Assessment, Pakistan was required to approve and notify the Public Procurement Regulatory Authority Rules 2026 by June 2026. However, the government missed the deadline as discussions with the IMF remained unresolved over provisions governing direct contracts between government procuring agencies and state owned enterprises. The disagreement is particularly focused on Rule 32-F, which sets out the circumstances under which government bodies can directly contract state owned professional, autonomous or semi-autonomous organisations.
The IMF has proposed that government procuring agencies should generally not award contracts directly to state owned professional, autonomous or semi-autonomous organisations for goods, works, services or consultancy. Instead, direct contracting would be restricted to exceptional circumstances where there is a clear justification for bypassing a competitive procurement process. The proposed approach is intended to place tighter limits on direct government to state owned enterprise contracts and establish clearer conditions under which such arrangements may be considered.
Under the IMF’s proposed framework, exceptions could include projects involving urgent works and services, as well as assignments covering geographically scattered or remote areas where direct contracting is considered to be in the public interest. These exceptions would provide government agencies with an avenue to award contracts directly where specific circumstances make competitive procurement difficult or where an urgent public requirement exists. However, the IMF has sought to ensure that such cases remain exceptions rather than becoming a routine method for awarding government contracts.
The proposed procurement framework also addresses the use of subcontractors when state owned entities receive direct contracts. Where specialised components of a project require assistance from outside parties, the IMF has suggested that subcontracting should not exceed 40% of the total work. Pakistan has accepted this 40% ceiling, although the government has proposed allowing the relevant authority to revise financial limits under the rule from time to time. The difference over the broader direct contracting provision remains part of the discussions surrounding the new procurement framework.
The IMF has further proposed that exceeding the permitted subcontracting limit should be treated as a material deviation from the procurement requirements. Such a deviation could potentially fall under provisions dealing with collusive, coercive, corrupt, fraudulent and obstructive conduct. The proposed treatment would introduce additional consequences for arrangements that exceed the permitted level of subcontracting and would place greater emphasis on compliance with the limits established under the procurement framework.
The proposed rules also contain provisions concerning the eligibility of contractors and other participants in government procurement. Contractors, beneficial owners, owners and directors who are facing certain court proceedings that could potentially result in bankruptcy, as well as individuals or entities with previous convictions, could be disqualified from participating in government bidding. These provisions form part of the broader procurement framework being discussed as Pakistan works to update its rules governing public sector contracting.
Another area highlighted by the IMF is disclosure when a direct contract is approved. The lender has called for greater transparency around such decisions, including stronger disclosure requirements when government agencies decide to award contracts directly. The additional disclosure requirements are intended to provide greater visibility into the circumstances surrounding direct awards and the basis on which government procuring agencies approve them.
The disagreement over Rule 32-F has therefore become a central issue in the delay surrounding the Public Procurement Regulatory Authority Rules 2026. Pakistan has already accepted the proposed 40% ceiling on subcontracting but has sought flexibility regarding financial limits under the provision. The government and IMF continue to differ over the extent to which direct contracts with state owned entities should be permitted and the safeguards that should apply when such arrangements are used.
The IMF’s position seeks to establish direct contracting as an exceptional mechanism rather than a standard route for government procurement from state owned companies. The proposed framework would restrict direct awards to specific circumstances, place a limit on subcontracting and introduce additional disclosure requirements. The outcome of discussions over these provisions will determine the final form of the new procurement rules, which are intended to replace the Public Procurement Rules 2004 and strengthen the framework governing public sector procurement in Pakistan.
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