SOEs: privatisation the only solution

Driven by the current ‘four-point must list of IMF’ to qualify for the next tranche of Fund’s lending in November this year, the incumbent government has picked up the settlement of loss-making state-owned enterprises (SOEs), an area that has been a major irritant for the Fund for long; ailing SOEs have also drained the meager resources of Pakistan.

Circular debt stands at Rs 2.7 trillion despite repeated and significant increase in electricity tariffs because of the non-performing energy sector of the country. The loans and guarantees stand at nearly Rs 6 trillion to sustain loss-making SOEs.

Prime Minister Shehbaz Sharif has reportedly ordered the reform of loss-making institutions on a priority basis at a meeting held in connection with ailing SOEs. The meeting was informed about the pace of progress in these institutions, including the corporations.

The meeting was further informed that in order to provide a modern system and the best facilities, presence of experts on the boards of these institutions will be ensured.

In the meantime, the Ministry of Finance (MoF) has prepared a draft state-owned enterprises (SOEs) policy with the objective of effectively managing the fiscal risks associated with SOEs. The policy underlines that Pakistan has around 200 SOEs, which are engaged in a diverse range of activities.

They represent a significant part of Pakistan economy and provide and manage a significant share in the country’s infrastructure, communication and utilities sectors. It states that the optimal performance of SOEs is the requisite crucial factor for medium to long-term macroeconomic resilience and growth prospects.

The optimum performance of SOEs can be attributed to several factors, including: (a) a consistent and overarching law that applies to all SOEs; (b) an overarching SOE ownership and reform policy; (c) a clear-cut commercial mandate under which SOEs may operate; (d) a well-defined criteria to appoint capable and well-equipped Boards of Directors to govern SOEs; (e) effective centralized SOE ownership monitoring; (f) economic and strategic analysis of SOE performance and financial monitoring and (g) transparency and effective accountability system.

The draft policy noted that the federal government shall own or retain only those SOEs that are determined to be strategic as approved under ‘SOE Triage’. Strategic SOEs are those SOEs that (a) have such significant strategic, security, or social importance that they cannot be entrusted to only private ownership.

Strategic SOEs can be defined as those SOEs serving as a strategic objective or owning and managing strategic assets, (b) are a monopoly service provider and there is no effective economic regulatory oversight of their operations.

The time for reforms is more or less over. It’s time for action. Ironically, successive governments, for decades, have been holding onto SOEs for multiple reasons and many reforms have been rolled out but with no success.

The reason is most of the SOEs are now beyond restructurion and reforms. Governments, over the years, applied multiple reforms and doled out public money to sustain the national carrier PIA. In terms of technology and human resource and skills, the airline is no match for competing airlines. PIA needs massive investment and eviction of non-performing human resources to be able to survive the competition.

Both of these are not possible to be achieved because of scarcity of funds and fear of political consequences. Same holds true for Pakistan Steel Mills. This, too, requires massive finances to replace technology and human resources - which again is not possible. Similar is the position with regard to most of the SOEs in all the sectors stated above - be they strategic, security or of social importance.

A sustainable way out is outright privatisation of ailing SOEs, which will achieve some revenue for the government. More importantly, it will arrest the public money drain.

The Pakistan Muslim League-Nawaz (PML-N) government in its 2013 - 2018 tenure had embarked on a privatisation of SOEs plan and made good progress in relation to sell-off of state-owned power distribution companies (Discos). In this regard, financial advisors to steer the privatisation processes were short-listed. Unfortunately, however, the government aborted the entire process due to political considerations.

Majority of the well-performing emerging markets have moved all businesses to private ownership and management. For example, India, which for long had held onto SOEs, realised in late 1990s that private sector is the right channel in terms of greater revenue for the government and reliability of services to the public.

Majority of defense production in India is now in the private sector. The national carrier was handed over to its original founders, Tata Group, which reportedly has placed a massive order for procurement of state of art aircrafts with a view to positioning the airline as a front-line global carrier. Pakistan is now at a crossroads again. Outright privatisation is the only solution, so to speak.

Copyright Business Recorder, 2023