Raising equity for SOEs

It is argued that since the economy had nothing but government-run businesses, it was no wonder the Soviet Union collapsed. According to a press release, President Asif Ali Zardari has advised the PPP-led government to privatise state-owned entities (SOEs) by raising the bulk of equity through the country's stock exchanges. This, the release argues, would lead to create wealth for the small investors.
Theoretically, this is a sound economic logic. However, reality based on existing local conditions compels one to raise some red flags prior to supporting such a proposal. The first reservation that must be identified for consideration by the President is rooted in history: Benazir Bhutto did attempt to adopt this route and public was offered shares in PIA under the privatisation policy through the country's bourses.
Unfortunately, however, that effort received insipid public response. Her government then compelled five nationalised commercial banks to subscribe to the issue. A listless public response was quite warranted mainly due to a widely-held perception that managements under such arrangements do not usually work for the shareholders as ministries are held hostage by unions to serve politicians in power as a cardinal principle of their job description. The President needs to be aware that this policy was not a success.
Second, the President must be aware of the existence of a highly objectionable practice within the present set up to appoint, promote and transfer on the basis of cronyism, nepotism and political loyalties, as opposed to merit be it in terms of the required qualifications or relevant past experience.
This approach has not only compromised the capacity of the SOEs to be profitable but also accounts for massive annual bail-out packages from the budget - packages that no country can afford indefinitely. Several federal ministers have stoutly defended reinstatement of laid-off and contractual workers as well as the need to create new jobs in SOEs as a fulfilment of the pledges made by the party in providing employment opportunities.
What has been ignored is that this decision is responsible for over-staffing, which in turn, is primarily responsible for increased losses in SOEs. In other words, this policy amounts to killing the goose that lays the golden egg. Subsequent governments have been compelled to provide a consistent financial support to the loss-making entities from the budget, thereby causing a setback to all those efforts aimed at improving social sector indicators as well as drying up of resources to maintain and improve the country's infrastructure.
In other words, the underlying need is a fiscal imperative. Therefore, it needs to be handled by fiscal authorities. It is only after the SOEs are restructured and turned around that the Privatisation Commission has a role to play whether it is through the bourses or public-private partnership or sold through a bidding process.
At the same meeting, the President also asked the Governor State Bank of Pakistan to prepare a plan for restructuring of Pakistan Railways with a view to making it a financially viable entity. Why has the President favoured this route? Because, Pakistan Railways has been bursting its overdraft limit with the central bank and now finds itself on the verge of bankruptcy.
The Cabinet Committee on Reforms (CCoR) has already laid down the guidelines on reconstitution of Board of Directors of all power distribution, transmission and generating companies. The same CCoR guidelines need to be adopted for these SOEs. First and foremost among them is that no minister or Federal Secretary or government official will serve as the Chairman of the Board of Directors.
The offices of Chairman and the Chief Executive would remain separated. Representation from the oversight ministry or division on the BoD would be restricted to one. The BoD must have the right mix of professionals with requisite background of the market niche a particular SOE is operating in. This is also not enough for the task.
These guidelines need to be supplemented with: (a) The Board of Directors needs to be appointed for three years as per Company Law; (b) it must have full powers to exclusively appoint the CEO and senior management; (c) the board must lay down the policy guidelines; (d) the directors must exhibit a profound spirit of entrepreneurship to make a worthwhile difference; and (e) the management must be exclusively recruited by the BoD without any interference from the Cabinet Ministers and Federal Secretaries.
The political leadership of the PPP needs more clarity. They need to understand that in order to attract the right kind of professionals to manage an SOE their managers need to be given adequate powers and paid above market - as the challenge to restructure these behemoths is greater than running normal businesses.
Restructuring these SOEs would also require rightsizing by reducing the staff and workers strength. To achieve this, one-time funding for a golden handshake scheme would need to be provided. All this has been done prior to privatisation of four government-owned banks. Once the balance sheet of each SOE shows the turnaround only then can their shares be off-loaded on the bourses at a premium.
It is quite clear that PPP leadership is opting for public-private partnership and not for privatisation per se. It is not the best option, as government should not be involved in operation of businesses. However, public-private partnership is still a good option in a bad economy.
But if not undertaken properly the country may end up with not the best but the worst of both the worlds, ie, a jackass instead of a horse or a donkey. The Industrial Revolution, which ushered in the modern world, was to a significant degree a break-away from government-run businesses. As Harvard economic historian Professor David S. Landes explained.
The state of the seventeenth and eighteenth centuries was incapable of planning development nationally or allocating resources efficiently. The state promoted monopoly, when nothing could have been more harmful for long-run development. State assistance was more often than not an encouragement to laxity and a cover for incompetence. With some notable exceptions, privileged enterprises were sloppily managed and required repeated transfusions of royal capital. Often they turned out an inferior product that could be disposed of only to captive customers, like army regiments.