Elephant in the room

To understand strategy in a simple manner three questions are quite helpful. When deciding on a course of action ask these questions: What next, what next and what next.

As simple as they seem but they possess a great power to challenge anyone to consider the plan of action in the light of what will be the consequences, generally all intelligent people think about the consequence of their actions before committing them, but the wise ones think in a series of these question to fully understand the ramification of their deeds.

Pakistan got a fresh Stand-By Arrangement (SBA) from the IMF (International Monetary Fund) and rightly the mood has elevated from stock exchange to currency market. This is a good development and quite a lot has been said and written about it. However, these three questions remain burning in my mind, what next, what next and what next.

We had to bend over backwards and go through all kind of hoops to get this programme without which default was staring us in the eyes and the chaos that ensues with it was just around the corner. We have averted it by taking fresh loans, what next, our debt payments will be even higher, and we need to pay even more interest. What will happen in a year’s time, two years’ time and five years.

We have run out of all the slack anyone could cut us and now we need to be serious about pulling our weight.

We must tighten our belt but that would include reducing the burden of government expenses that are non-developmental in nature.

A lot has been said about the wasteful expenditure on protocols, vehicles and cavalcades, etc. We must also look at the elephant in the room which is the state-owned enterprises that are bleeding the economy with every passing day. According to various estimates, we’re losing hundreds of billions of rupees every year to these state-owned enterprises.

According to some reports, SOEs lost 187 billion in 2016-17, 286 billion in 2017-18, and 143 billion in 2018-19. The figures are not encouraging for the most recent years either. These SOEs are running huge debt which was 1.74 trillion in May 2022.

14 largest loss-making SOEs got government support that was 0.8 percent of GDP and all SOEs received 1.4 percent of GDP in 2021-2022.

Government has been lending to these enterprises and this financing stood at 3.5pc of GDP in FY21-22, of which nearly a third was overdue. Loss-making SOEs may lack the means and intention to repay government loans because most of them are not generating enough to do so and there are no direct consequences for not doing so.

World Bank report titled “Pakistan Federal Public Expenditure Review 2023” ranks Pakistan’s SOEs as the least profitable in entire South Asia; their combined losses grew faster than assets, and the incremental resulting losses are a significant annual drain on public resources. The accumulated losses of these SOEs amounted to 3.1 percent of GDP in 2020-2021. On the other hand, these SOEs consume more than Rs 458 billion annually from public funds to maintain their existence.

The World Bank in its latest report “Hidden Debt Solutions to Avert the Next Financial Crisis in South Asia” says that the SOE sector in Pakistan is more than twice as large as the international benchmark. In the past five years, the total liabilities of loss-making SOEs in Pakistan have hovered around 12 percent of the GDP.

All these figures show that we are in a romantic relationship with SOEs where we find ourselves bound to the SOEs in the same manner as proverbial “Laila, Majnu” story where Majnu could not lose the sight of Laila.

Whereas nationalisation has been a historic mistake that merits a different discussion some other day but this rise of the SOEs has brought Pakistan to its knees. For most of their part SOEs have ushered in an era of inefficiency, incompetence, mismanagement and corruption.

Most of our state-owned enterprises are known for their inefficiency and lack of competitiveness compared to private-sector counterparts. Bureaucratic procedures, political interference, and a lack of accountability that hinders their performance and productivity. These inefficient SOEs are draining public resources and have become a burden on the economy.

The government has been providing subsidies, bailouts, or financial support to keep these enterprises operational, diverting resources that could have been utilized for other developmental purposes, such as healthcare, education, or infrastructure.

SOEs are a playground for mismanagement and corruption due to their size, lack of transparency, and political interference. These have crowded out private sector participation and competition. It is quite plausible that SOEs have lowered the standards of innovation, distorted market dynamics, and discouraged private sector wherever they have a strong presence or at least drained the funds and will of the government to support private sector to perform.

Political considerations have skewed the decision-making, leading to investments in unproductive or unsustainable projects that are not aligned with market demand or economic priorities.

One can go on and on to recount what SOEs have done wrong and all what they are capable of inflicting on our economy. So, what’s the answer, we must privatise SOEs.

Sure, we must privatise the SOEs but privatisation for the sake of privatisation is not an answer. There have been few examples where privatisation of a good performing enterprise did not achieve any improved outcome for our economy: the case in point is PTCL.

Before privatisation PTCL was one of the leading telecom players in Asia. It had a large pool of expert technicians, many of whom had even been deputed for short periods to foreign countries to help lay telecommunication networks. Within South Asia, it had been the first to introduce several technologies and had an extensive telecom network.

Its financial performance was also good with revenues of 84 billion rupees and a net profit of 27 billion rupees before privatisation. While the sector boomed worldwide and companies in other countries bought licenses in foreign markets and acquired newer technologies to retain and gain subscribers, PTCL was prevented from using these earnings to make strategic investments abroad.

After privatisation the government failed to recover the full price from the buyer ($800 million is still outstanding), but if the calculations are made taking in view opportunity costs, it has paid back almost all the amount it received.

In the six years post-privatisation, earnings fell to almost eight billion rupees showing a negative growth of 18 percent per annum and the profit margin declined steadily.

The point worth noting is privatisation is not an ideology that needed to be followed blindly, rather it is a tool to stop bleeding of the economy by changing the management and structure of SOEs and also allowing these companies to be restructured, reorganised, assets carved out to generate value for government.

These should not be exercises where loss-making enterprises are sold for a pittance based on their performance without regard to their assets which can be put to different use and create far more value, these include, real estate, steel and machinery scrap, underlying mineral assets etc. There are many cases where privatisation has resulted into mega real estate schemes in place of the companies that were thrown away for a song.

It goes without saying that as a broken clock is right twice a day, so we have few examples of privatisation gone right also where privatised units started performing and generating economic activity.

There are certain cliches like installing a professional board on an SOE will improve its business performance, which is seldom the case because generally the all-knowing bureaucrats keep a very tight leash on the CEOs and the board alike and if we look into the model of corporate governance a board does not run the company rather provide directions that are to be implemented by a professional management under the CEO.

Government must be clear in its objectives of privatisation so that appropriate strategy may be used. The following are some crucial factors and actions that must guide the process. Starting with establishing a clear policy framework outlining the goals, standards, and guiding principles for privatisation.

Performing a thorough analysis of the SOEs including financial performance, asset valuation, market potential, legal and regulatory requirements, and social effect should all be considered. This should guide the strategy for privatisation.

To foster confidence and draw reputable investors, make sure the privatisation process is transparent. Establishing procedures to defend the public interest before, during, and after privatisation.

These are just a few points; many could be added but in my view it is not the lack of knowledge that is hindering our processes and relegating the outcomes to a suboptimal level, rather it is our will to act on our own plans and policies and also our inability to learn from our past.

It would serve us very well if we create a reliable monitoring system to evaluate how well previously privatised organisations are operating and where we have gone wrong and where we were able to get it right. Without this objective and unbiased feedback informing our future decision-making we are bound to commit the same mistakes.

It was almost ten years ago I was called to read a paper on SOEs in an international conference, I am amused to see that in these ten years our situation has not changed a bit and if I read that paper again it would appear fresh and as per our current situation. It is an indication of a malaise that we are not improving, rather we are repeating the same mistakes every time and expecting different results.

I must repeat a great quote:

“The definition of insanity is doing the same thing over and over again and expecting different results.” It is quite famous and attributed to Albert Einstein. However it is not his quote, this was published by a pamphlet for drug addicts called “Narcotics Anonymous pamphlet” with slightly different wordings and it goes, “Insanity is repeating the same mistakes and expecting different results.”

Quite amusing that the quote that suits our current situation is a saying that had been used for drug addicts to motivate them to change their ways and pull them out of their slumber. I hope this would work for them but we as a nation need something far more potent than this quote to wake up.

Copyright Business Recorder, 2023