Govt has no business being in business

Federal Finance Minister Muhammad Aurangzeb in a televised speech this Tuesday cleared the air on IMF (International Monetary Fund) delays, saying that assurances of external financing from three friendly countries – China, Saudi Arabia, the United Arab Emirates— and private lenders are expected soon; upon which, the 7 billion dollar International Monetary Fund (IMF) programme would be put up to the IMF board for its final approval for which a staff-level agreement (SLA) was reached on 12 July 2024.

Much of the IMF package, as rightly coined ‘the bailout package’, would be utilised to offload part of the mounting debt burden to help avert default. However, much more funds from other sources and internal revenues are needed to reach safe waters.

The next IMF milestone on the horizon is the privatisation of loss-making public sector enterprises (PSEs) and restructuring of the ones where feasible. Along this is a demand for a dramatic cut in government expenditure.

Undoubtedly, however, this milestone has a political cost and consequences for the party in power, hence the delays on it. The government is now checkmated to proceed on it.

There are conflicting reports in the media on privatisation and the government must clarify its position. One report says that the federal government has decided to close 33 State Owned Entities (SOEs), abolish or declare 60 percent of vacant regulator posts; i.e., 150,000, outsource non-core services and right-size six ministries in the first phase.

Another report, in the same context, stated this week that the federal cabinet has approved the recommendations submitted by a high level committee tasked with reorganization of government departments for the merger and dissolution of 82 State-Owned Enterprises (SOEs).

“These 82 entities are being transformed into robust institutions through digitisation, smart management, efficient governance, transparency, and swift implementation to provide better facilities to the common man,” the statement added.

Kaiser Bengali, a member of the austerity committee, the rightsizing committee, and the government expenditure committee formed by the Prime Minister to reduce government expenditures in his resignation letter, cited the lack of government commitment to reduce expenditures, saying that he was immensely disappointed that of the 70 government organizations reviewed, the Committee recommended privatizing 17 commercial entities and retaining 52 government organizations, while closing down only one!

Speaking recently at the media briefing at Karachi Press Club (KPC), Bengali stated that the focus of the Committee has shifted to retaining almost all the government entities but making them more efficient.

He disclosed that in his detailed report to the Committee, he had recommended abolishing 17 Divisions and nearly 50 government organizations that would have reduced a substantial number of BPS 20 to 22 positions and effected annual savings of over Rs 30 billion in non-salary costs.

However, the two statements of the Finance Minister Muhammad Aurangzeb on the subject are meaningful and stand their ground: (1) The government has no business to be in business; (2) there are no “strategic state-owned enterprises” (SOEs) - as he stressed the need for privatisation.

How much of that unfolds on ground is yet to be seen.

Time and again, at the time of privatization, the term ‘National Strategic Assets’ has been redefined suiting the then prevailing political and vested interests. The state of Pakistan has suffered much on account of it. During the tenure of Shaukat Aziz Pakistan Steel and Pakistan State Oil (PSO) were put up for privatisation.

At that time PSO was a blue chip company and rated among the 500 Fortune companies of the world while Pakistan Steel was struggling to survive. Both the enterprises attracted immense interest of the global investors and very attractive offers were being processed.

At the last minute, however, PSO privatization plan was aborted on the basis of it being declared a strategic state asset while Pakistan Steel became a victim of court intervention. PSO today is struggling to stay afloat while Pakistan Steel is shut; it is a massively debt-ridden entity.

Once again, during the current phase of privatization, the term ‘ National Strategic Assets ‘ is being redefined.

The Cabinet Committee on State-Owned Enterprises (CCoSOEs) this week approved a summary to categorise the Small and Medium Enterprises Development Authority (SMEDA) as an essential SOE, Pakistan National Shipping Corporation (PNSC) as a strategic SOE, Trading Corporation of Pakistan (TCP) as an essential SOE under the SOEs Policy, 2023. As the process moves on more of the entities are likely to be added to the list.

SMEDA was established in October 1998 for encouraging and facilitating the development and growth of small and medium enterprises in the country. It was stated to be not only the SME policy-advisory body for the government of Pakistan but it was also described as a vehicle to facilitate other stakeholders in addressing their SME development agendas.

How far SMEDA has lived up to its agenda can be judged from the growth of SMEs in Pakistan and how much facilitation the entity is providing to SMEs. The ground realities on both accounts are depressing, to say the least. Preparation of countless feasibility studies based more on vision than ground realities is not what SME needs.

Established in 1967, Trading Corporation of Pakistan (TCP) acted as a public sector trade house for export of agriculture and consumer goods and import of essential commodities under the specific directives of the Government. However in January, 1995, the Federal Cabinet assigned the new role of exports and imports of commodities. Over a period of time much of TCP functions have moved over to the private sector for trade, notably, in agriculture and consumer goods.

Pakistan National Shipping Corporation Limited (PSX: PNSC) experienced a fall of 20.81% YoY in its profitability in the first half of fiscal year 2024, clocking in its profit after tax at Rs9.49 billion [EPS: Rs71.86], compared to a profit of Rs11.98bn [EPS: Rs90.74] in the same period of last year (SPLY).

After touching a peak of over 8 billion dollars in 2007, the Foreign Direct Investment (FDI) is on a downward trajectory.

According to State Bank of Pakistan, yearly total foreign investment fell from $4.58bn in FY21 to around $1.86bn in FY22 before plunging to just $601m in FY23. This brings into question the role and the effectiveness of Board of Investment of Pakistan (BoI).

It has long been globally understood that ‘government has no business being in business’. The countries that have understood this are the ones who are prospering. One of our neighbors, India, is one such example. What has been added to it is that ‘the government has no business to be a business facilitator’.

The dynamic emerging markets have moved this role from public sector to business chambers in the private sector, who have the best of market and customer intelligence and contacts. Once again India is one such example.

In case of Pakistan a foreign investor invariably knocks at the door of Overseas Investors Chambers of Commerce and Industry and other foreign affiliated business chambers like Swiss Business Council, American Business Council and more of them to get the first hand and realistic information on investment potential and guidance.

The government entities entrusted with investment and trade are required to redefine and minimise their role.

Privatisation, big or small, is inevitable. What is worrying is the sizable unemployment. The state has to work a realistic strategy to mitigate its consequences.

Copyright Business Recorder, 2024