PSEs' inevitable destiny

It seems that the Financial Restructuring Package or a bailout package of Rs 18.5 billion approved for Pakistan Steel Mills (PSM) in April, 2014 has failed to make the promised impact. According to a news item in the Business Recorder on 27th August, 2014, government has released the fourth tranche of the package amounting to Rs 2.125 billion to the PSM for salaries and other financial needs, including procurement of raw materials. Out of this amount, an amount of Rs 1.3 billion was to be spent on the payment of salaries for the later half of June and for the month of July, 2014 while the remaining amount will be utilised for the procurement of raw materials and payment of utility bills including gas, power and water. It may be recalled that PSM chief Major-General Zaheer Ahmed (retd) had sough a bailout package from the government for the country's largest state-owned steel producing plant on the basis of certain commitments. Although, the government is releasing the amount of restructuring package as per the agreed schedule, PSM management has failed to retain the output of the enterprise as per commitment made at the time of the package. For instance, PSM's production was to be raised phase-wise, with its output to increase to 20 percent in July, 2014 and 60 percent in FY15. As against this, production was only 8 percent in July, 2014 and the current year's target was not likely to be achieved as the production was only 15 percent of the installed capacity at present. This was despite the fact that the Ministry of Finance had so far released about Rs 12 billion under the approved restructuring plan.
The government's experience to restructure PSM appears to be highly frustrating. It may be noted that PSM has faced billions of rupees losses over the last many years due to inefficiency, mismanagement, overstaffing and incompetent leadership. The extent of financial crisis could be gauged from the fact that the monthly losses of PSM are estimated to be about Rs 1.5 billion and its overall debt and liabilities had reached over Rs 110 billion by March, 2014. Its financial position is so precarious that the management cannot maintain the PSM even in its existing position, nor does it have the funds to procure the necessary raw materials. In fact, Ministry of Finance has to dole out funds for salaries and other benefits when the pressure becomes unbearable to secure the livelihood of thousands of its employees. The present bailout package was premised on strengthening the financial position of PSM so that it could increase its output to the normal levels obtaining in the steel industry but it also seems to have met the same miserable fate. Needless to say, the continuation of the status quo would require the government to infuse billions of rupees in a bottomless pit and put an unbearable burden on an already faltering federal budget. The same amount of money could have been used for development projects or at least saved to reduce the fiscal deficit of the country.
This is not the only PSE bleeding the budget continuously and destabilising the economy. In the Business Recorder on the same day, it was reported that ECC of the Cabinet has approved a sovereign guarantee of Rs one billion for Pakistan International Airlines (PIA). This guarantee would enable PIAC to raise this amount from a private bank. While approving the guarantee, the Finance Minister underlined the need for PIAC to improve its performance both financially and by providing quality service to its clients. The loan is meant to be utilised on an engine and component support programme and ensuring fuel supply to the national airline. Although, the amount would not be payable from the budget because the loan is backed by a government guarantee, it becomes a contingent liability of the government, which is to be paid from the budget if the borrowing entity fails to repay the loan in time. However, contingent liabilities are not added to the overall debt of the country but at the same time such off the balance sheet transactions cannot be overlooked in order to have a holistic view of a country's fiscal position and the risks associated with the obligations incurred by the government outside the budget. Unfortunately, however, outstanding stock of government guarantees extended to PSEs has been increasing over the years and stood as high as Rs 558 billion at the end of March, 2014. Experience suggests that this amount is not going to stay at this level or decline because of the continuous financial mismanagement in the PSEs and ultimately the government would be obliged to pay the amount from the budget. The main focus of the PSEs Reform Strategy of the present government is said to be aimed at improvement in corporate governance, restructuring of PSE, and Strategic Partnership through privatisation. The government has also formed a high level commission for ensuring transparency in the appointments of heads of key PSEs. However, these initiatives have not yielded the desired results so far. It is, therefore, time to change tack and adopt the privatisation route or declare the PSEs insolvent, which have no chance to be financially independent. We are aware of the consequences of such a policy, particularly a very tough opposition from the opposition parties and the labour unions, but the continuation of the present strategy would have disastrous effect on the fiscal outcome and the economy of the country.