EDITORIAL: Poorly performing state-owned enterprises (SOEs), wracked with chronic inefficiencies and ringing up losses worth billions over many years, have long been a drain on public resources, leaving the government with little room for fiscal manoeuvrability.
This was brought into sharp focus by the State Bank of Pakistan’s (SBP’s) recently released annual report for 2023-24, which included a section on “Reforming SOEs in Pakistan”, lamenting the glacial pace of the reforms process that has led many of these entities to consistently report net losses over the past eight years, with the government’s cumulative fiscal support to them in the form of subsidies, grants, loans and equity injections ballooning to a massive Rs5.7 trillion or 1.4 percent of the GDP between FY16 and FY23.
It is clear that the current trajectory of government support and bailouts to SOEs must be substantially altered to address the growing concerns regarding Pakistan’s fiscal viability.
As highlighted by the SBP report, most of the losses emanate from two sectors: power, and infrastructure, transport and Information Technology & Communications (ITC). These sectors’ losses significantly outweigh the profits generated by other sectors, particularly oil and gas, which is the largest contributor to total SOE profits.
The power sector recorded combined losses of Rs208 billion, accounting for 29 percent of total SOE losses in FY23, while the infrastructure, transport and ITC sector was responsible for 69 percent of total SOE losses, with the National Highway Authority and PIA being major contributors in this regard. What is often ignored is that many profitable SOEs benefit substantially from government contracts, and if exposed to competitive market conditions, could struggle to remain efficient.
Internationally, many of the success stories pertaining to SOE reforms suggest that fruitful transformations of these entities often hinge on meaningful reorganisations of the sectors they are operating in, with there being a focus on deregulation and fostering increased competition.
Furthermore, establishing robust corporate governance frameworks that address strategic management inefficiencies, and encourage transparency and accountability are also vital prerequisites of an effective reform exercise. And contrary to popular belief, bringing about changes in ownership through complicated, long drawn privatisation processes isn’t necessarily a panacea for addressing SOEs’ structural inefficiencies.
In Pakistan, a deep-seated resistance to initiating a truly consequential reforms process has resulted in fragmented efforts, often missing coherence and direction, driven more by external pressures from international lenders than by an intrinsic motivation to enact truly substantive changes in loss-making entities.
Lack of political consensus on the best path forward to reorganise SOEs, resistance from the bureaucracy and within the SOEs, difficulties in managing labour issues, and a general disregard for international best practices and expertise concerning SOE reforms have made this exercise a cumbersome, laborious endeavour.
Privatisation transactions, for example, have too often been excessively drawn-out, taking about six to 16 years to complete, according to the report. It is little surprise then that the privatisation of PIA, for instance, with its massive losses, is proving to be such a challenging and time-consuming effort, stifling the progress of SOE reforms.
Despite recent signs of increased government commitment in this area, as evidenced by the passage of key legislations last year and the establishment of a permanent cabinet committee on SOEs focused on enhancing corporate governance and promoting sectoral competition, any lasting impact will only be realised with genuine political will and consensus, alongside public support for a comprehensive reform initiative.
Moreover, it is essential to establish clear objectives and performance benchmarks for SOEs, targeting improved corporate governance to ensure accountability, transparency and effective management.
This structured approach remains critical for aligning SOEs with the country’s broader economic goals, as this will facilitate the optimal use of resources, boost revenue streams and alleviate the financial strain on the government.
Copyright Business Recorder, 2024
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