Sale of state-owned entities (SOEs) and not resuscitating the non-operational Pakistan Steel Mills is the mantra of the recently appointed economic team leader Muhammad Aurangzeb with overt backing from Prime Minister Shehbaz Sharif and other powerful stakeholders.
This is not a new policy decision. Sale of SOEs was pledged in discussions with the International Monetary Fund (IMF) by all three national political parties - from 2008 onwards - and the schedule for sale/reorganisation before sale of specific entities stipulated.
However, organised resistance by the staff supported by the then prevailing political opposition invariably led to, at best, deferral and, at worst, indefinite deferral of the privatisation plan.
Today, however, an additional negative element to this policy is the lack of environment conducive to investment inflows due to the ongoing economic impasse.
A buoyancy of the stock market is cited as proof that a favourable environment exists however this is simply not a valid assumption given the poor rating by all three international rating agencies, which may improve as and when the “successor” to the recently completed nine-month long Stand By Arrangement (SBA) is approved by the IMF.
In addition, low portfolio investment (July-May 2024 of 1170.7 million dollars in spite of a high discount rate during this period) bodes ill for Pakistan being considered attractive to foreign investors.
The government’s overarching objective with respect to privatisation appears to be to eliminate nearly a trillion rupees annual budgeted support to prop up loss-making entities with the three white elephants notably Pakistan Steel, Pakistan International and Pakistan Railways major contributors.
Two critical factors must not be ignored: (i) most of the SoEs operate within a monopoly setting and care must be taken to ensure that a private sector owner does not operate the unit as a monopoly by reducing supply to raise windfall profits to the detriment of the interests of the consumers/clients; and (ii) a detailed empirical study is critical before proceeding with any sale. Several cabinet members recently announced that a couple of electricity distribution companies would be privatised – the salutary objective being to enhance efficiency. Clearly, this decision appears to have been taken without first carefully assessing all pros and cons of a sale.
The example of 2005 K-Electric privatisation is available and one can draw some obvious lessons, notably that K-Electric still requires subsidies under the tariff equalization policy (174 billion rupees budgeted this year) which makes a mockery of the stated objective of the sale.
Thus, either the government opts to abandon the tariff equalization policy or else revisits its decision to privatise two of the distribution companies.
The current thinking in the corridors of power is to privatise units through proactively seeking foreign direct investment (FDI) from friendly countries with all lacunas in the sale to be promptly dealt with by the Special Investment Facilitation Council (SIFC) staffed with representations from the highest civilian (federal and provincial) and military establishment down to the ranks for a specific project proposal. While SIFC was established on 17 June 2023 and over 20 to 25 billion dollars of non-binding Memoranda of Understanding (MoU) have already been signed yet to date binding contracts are still awaited.
In this context, it is relevant to note that MoUs of a similar amount were pledged during previous administrations but were never transformed into binding contracts. The SIFC can draw important conclusions from these past failed attempts.
The consensus in the corridors of power today appears to be that there were some serious personality issues in previous administrations; however, it must be acknowledged that investment decisions are not based on religious or cultural or long-standing ties between the leadership of two countries but on the state of the economy and the risk - political and economic - associated with their investment.
The IMF has repeatedly urged the government to ensure transparency of decisions taken at the SIFC forum. This maybe good advice as SIFC needs to carefully review each proposed contract before signing off on the dotted line to (i) ensure that obligations do not have long-term negative consequences for the general public, an example is the contracts signed with Independent Power Producer’s under the umbrella of the China Pakistan Economic Corridor (CPEC) agreeing to capacity payments and 100 percent repatriation of profit; and (ii) extending special fiscal incentives that would render our tax structure even more anomalous that would work against local investors.
Pakistan’s Plan A, so stated the incumbent Finance Minister, is to seek another IMF programme, the twenty-fifth since independence, reflecting our too frequent cyclical balance of payments’ issues that account for our failure to remit profits to foreign companies today while our economy’s inherent economic travails continue to persist with the power and tax sectors continuing to suffer from major performance issues.
The way forward is therefore to initiate structural reforms as a prelude to achieving a stable economy, and begin with the two most appallingly poor performing sectors - power and tax sectors.
As aforementioned, the tariff equalization policy requires an urgent revisit and the tax structure needs to be transformed into one that is fair, equitable and non-anomalous.
Sadly, the budget 2024-25 has made zero inroads in implementing the needed structural reforms and instead worsened the situation by persisting in policies of the past that led to the current impasse.
To conclude, the way forward requires more in-depth empirical study while undertaking urgent reforms in the two most appallingly run sectors notably the power and the tax sector.
Copyright Business Recorder, 2024
Comments
Comments are closed.