Business is not the government’s business

According to a World Bank assessment, Pakistan’s state-owned enterprises (SOEs) exhibit the lowest profitability metrics among South Asian nations, primarily attributable to pervasive mismanagement and malfeasance.

Notably, successive governments have demonstrated a reluctance to relinquish control of commercial entities and redirect their focus towards optimizing public welfare and socio-economic development outcomes.

Pakistan’s privatization endeavours have yielded notable successes in the banking and telecommunications sectors, precipitating a marked improvement in the financial fortunes of both the state and the general populace. A mere few years subsequent to privatization, these sectors underwent a transformative shift from incurring losses to generating substantial profits.

The banking sector’s post-tax profitability soared from PKR 9.77 billion in 2001 to PKR 73.115 billion by 2007, occasioning a concomitant increase in tax revenues remitted to the national exchequer, which rose from PKR 10.8 billion in 2001 to PKR 33.8 billion in 2007. Furthermore, in 2001, the loan write-off ratio for state-owned banks was observed to be twice that of their privatized counterparts in the private sector.

The banks that underwent privatization have transformed from exhibiting poor performance to achieving exceptional success. Previously, loan defaults were common due to inadequate risk management practices. However, post-privatization, significant improvements were made, and these banks’ losses turned into profits. For instance, UBL’s pre-tax profit plummeted from PKR 275 million in 1993 to PKR 59 million in 1994, representing a 79% decline. Following nationalization, successive governments withdrew PKR 17 billion from the bank for various political development schemes, which remained unrecovered. After privatization in 2002, UBL’s profits surged significantly.

Similarly, MCB, Habib Bank, and Allied Bank underwent remarkable transformations post-privatization, now showcasing stellar performance, contributing substantial taxes to the national exchequer, and setting new profit records. In the telecom sector, privatization revolutionized the industry, making telephone services accessible and efficient, unlike the pre-privatization era where MNAs and MPAs would struggle to get telephone connections installed in their constituents’ homes.

Pakistan embarked on a comprehensive privatization program between 1992 and 2001, encompassing diverse sectors including banking, telecommunications, automotive, cement, chemicals, engineering, fertilizers, ghee, minerals, and various other industries, as well as roti plants, newspapers, tourism, and state-held lands. This strategic initiative yielded favourable outcomes for the national economy, culminating in the attainment of novel development benchmarks.

Nevertheless, the financial performance of entities such as PIA, Pakistan Steel Mills, hotels, power generation, and distribution companies unequivocally underscores the notion that business operations are not a suitable pursuit for the government.

According to the Ministry of Finance, the cumulative loss of state-owned enterprises has ballooned to PKR 905 billion, representing a 23% increase from the previous year. However, independent sources estimate this loss to have soared to a staggering PKR 1.4 trillion. Notably, PIA’s loss stands at PKR 97.5 billion, National Highway Authority’s at PKR 168.5 billion, and Peshawar Electric Supply Company’s at PKR 202.2 billion.

Regrettably, the government recoups these losses by squeezing the private sector, either through exorbitant taxes or cross-subsidies on electricity. Consequently, neither are state-owned enterprises recovering from their losses nor is the private sector thriving, leaving Pakistan with no option but to resort to borrowing to meet its expenses.

In 2018, when the issue of government and private sector-owned Independent Power Producers (IPPs) surfaced, an agreement was reached to limit the dollar indexation to PKR 148 and profit margin to 12% for only 16 IPPs.

The present scenario reveals a significant disparity in capacity utilization and tariff charges among IPPs. Notably, 52% of government-owned IPPs are operating at a mere 33% capacity, yet imposing 100% capacity charges. Similarly, private sector IPPs are utilizing only 36% capacity but levying 100% capacity charges, indicative of inefficiencies and potential overcharging.

This scenario exemplifies egregious mismanagement. Subsequent to these agreements, malpractices such as fuel pilferage, coal theft, and heat rate manipulation were rampant, while efficiency measures were neglected across the board.

A recent analysis has revealed a significant disparity in the power generation capacity of IPPs in Pakistan. Despite possessing a cumulative capacity of 44,000 megawatts, these entities generated a mere 11,000 megawatts in the preceding year.

Furthermore, Pakistani consumers are being subjected to exorbitant capacity charges, averaging PKR 24 per unit, which is substantially higher than the global average of PKR 8 per unit. This results in an additional financial burden of PKR 16 per unit on Pakistani consumers.

The root causes of this issue can be attributed to malfeasance, incompetence, and mismanagement on the part of politicians, bureaucrats, and power plant administrators. If this trend persists, the consequences will be far-reaching, with the potential for widespread industrial shutdowns due to the forthcoming ‘Take or Pay’ agreements scheduled to take effect next year. A comprehensive examination of this situation is essential to mitigate its impact on the national economy.

A comprehensive forensic audit, if directed by the Supreme Court, is poised to shed light on the contentious agreements between the IPPs and the government. This inquiry is expected to uncover the egregious errors and discrepancies plaguing these agreements, including the suspected involvement of local investors masquerading as international entities.

As far as the Sovereign guarantee is concerned, the question of its implementation arises only when the agreements are made in good faith. However, if the government intends to engage in commercial activities, a critical question emerges: who will formulate the policy?

The present scenario reveals a striking anomaly: 52% of IPPs are government-owned, and the government is essentially contracting with itself, generating power at 33% capacity but billing the government at 100% capacity rates. Meanwhile, the remaining 28% of private sector IPPs must be compelled to renegotiate their agreements, ensuring that they charge consumers only for the actual electricity supplied, without any undue overcharging.

The forthcoming audit is anticipated to unravel the complexities surrounding IPPs agreements, promoting transparency, accountability, and a more equitable distribution of resources.

Pakistan’s economy is presently experiencing a downturn, with industrial activity at a standstill and exports stagnating at $23 billion.

The government’s mismanagement of IPPs is being borne by the general public. Acknowledging the need for a solution is crucial, as it will prompt experts to offer viable remedies. Notably, the business community nationwide has coalesced to protest against IPP agreements.

Therefore, the government should prioritize public welfare policy-making and desist from engaging in commercial activities, particularly in light of its practice of purchasing electricity from select power plants at an exorbitant PKR 300 per unit, thereby placing an undue burden on the national treasury.

Pakistan’s power generation capacity of 44,000 megawatts surpasses the annual demand of 23,000 megawatts, yet the country grapples with a persistent energy crisis. The government’s inaction has enabled private investors to capitalize on this disparity, placing an undue burden on the nation.

As industrial closures and unemployment continue to rise, the government is confronted with a critical decision: prioritize public welfare or acquiesce to the interests of IPPs. The nation’s economic viability hangs in the balance, as the energy crisis exacts a devastating toll.

With unemployment already at alarming levels, the potential for further factory closures and job losses looms large. Pakistan’s industrial sector, a vital component of its economy, urgently requires supportive policies and facilitation. The government must adopt a proactive stance to address this crisis and ensure a sustainable future.

Copyright Business Recorder, 2024