SOE reforms critical

The federal secretary, Industries and Production, informed the Parliament's Standing Committee meeting that the ministry is supporting the revival of Pakistan Steel Mills (PSM) through sale of minority shares with management control to the private sector on the same pattern as Pakistan Telecommunication Corporation Limited (PTCL). The financial advisor, to be appointed next week, would make the final determination on the matter, he said, adding that 8 to 10 parties have already shown an interest. Special Secretary Finance Division stated during the meeting that the revival plan is to be submitted to the Economic Coordination Committee of the Cabinet for approval which is headed by Advisor to the Prime Minister on Finance Dr Hafeez Sheikh. And the Chairman of the PSM board highlighted the financial liabilities of the company that has been non-operational for years, including the amount payable to retired employees and added that liquidation of slabs will take between 12 to 18 months and urged the Ministry of Finance to approach the NBP to remove the restriction on sale of slabs.

PSM is one of the three white elephants that successive governments, including the incumbent after 14 months in the job, have been unable to turn around. The other two are Pakistan International Airlines (PIA) and Pakistan Railways (PR). The second quarterly report for fiscal year 2019 released by the State Bank of Pakistan noted that "though large in size losses in the SOE sector are limited to only a few entities. Among these, transport and industrial entities such as PSM, PIA and PR have posted persistent losses over the past decade due to overstaffing, operational inefficiencies, regulatory bottlenecks and lack of new investment. Policy-related issues are also partly responsible." The report further acknowledges that "the most pressing issue that has emerged in recent years is of the circular debt, which has escalated financial constraints of the energy sector SOEs...these entities have contributed the most to overall SOE debt accumulation as well as fiscal support over the past." The government document titled "Federal Footprint - SOE Annual Report" notes that the support mechanism for SOEs includes subsidies, loans and grants provided by the federal government as well as sovereign guarantees as they represent contingent liabilities of the government. Data reveals that in terms of fiscal expense, SOEs accounted for 1.5 percent of GDP in 2016 and total income/revenue of the SOEs was 0.5 percent of GDP.

There is an urgent need to deal with the SOE sector particularly with respect to those entities witnessing heavy losses specifically the three white elephants as well as the over 1.5 trillion rupee circular debt. A look at the International Monetary Fund (IMF) ongoing 6 billion dollar loan package indicates that the PTI government pledged the country to: (i) jumpstarting the privatisation process; (ii) strengthening monitoring of SOEs; (iii) increasing SOE transparency; (iv) enhancing the SOE legal framework; (v) establishing a holding company which was established in March 2019, though without any resources its contribution is nil; and (vi) to develop a strategy to address circular debt in the power sector by end September 2019, though to date no such plan has been publicly revealed. Omar Ayub, the Minister for Energy is on record claiming that theft is down though without independent verification and without a commensurate decline in the stock of circular debt his claim is being challenged. To date there has been little evidence that any of these pledges are being met.

Fourteen months have lapsed since the incumbent government has been in office but it has been unable to take any measure to deal with the crisis posed by poorly performing SOEs though there is talk of sell-off of two RLNG plants, SME Bank and Women's Bank, Jinnah Convention Centre and Services International Hotel. However, all these entities have been on the list of privatisation for a number of years and yet were not sold. This indicates that dealing with SOE issues is a politically challenging task for reasons ranging from organised worker opposition/resistance to any changes relating to overstaffing to charges of selling the family silver at throwaway prices to litigation challenging any decision relating to the SOEs and the grant of stay orders. But something needs to be done or else their continued bleeding would leave less and less for social and physical sector development projects and one would hope that the government begins by appointing qualified and experienced people to deal with this crisis and bears in mind that an economist may not always have the right kind of experience to deal with technical issues relating to specific sectors.