The challenge of SOEs

The 190 State-Owned Enterprises (SOEs) comprising Public Sector Companies (PSCs), Development Finance Institutions (DFIs) and Authorities, employing a total of over 425,000 personnel, incur a colossal loss of around Rs 500 billion a year. In other words, these SOEs have inflicted an accumulated loss of over Rs 3 trillion over 5 years on the national exchequer.
A total of Rs 9,600 billion of various assets of SOEs, are supervised by over 900 board members. Neither the public, nor the government knows what is actually going on within the ambit of SOEs. But successive governments have doled out good money for a bad cause to sustain these enterprises.
For any economy, this loss is a sheer waste. For the fragile economy of Pakistan, it is in fact a shameful waste.
The malaise is decades old. The incumbent government attempted to salvage the SOEs by positioning them under the 'Sarmaya Company' umbrella but this did not work out. Their privatisation is also on the back burner and their restructuring is also elusive.
Early this week, the government announced that it is working on a plan to amend the law to attract professionals from the private sector for their appointments in different state-run enterprises. The government is said to have tasked the Adviser to Prime Minister on Institutional Reforms and Austerity Dr Ishrat Husain to identify the factors hindering the hiring of competent professionals from the private sector.
The incumbent government has spelled out the following: "The talent from the private sector could not be attracted merely through local advertisements. Experts in the field usually do not respond to such advertisements. It is only through headhunting such talent could be attracted from the private sector. Unfortunately, the existing laws do not allow appointments through headhunting or international advertisements."
To get around it, required changes in the Companies Act and corporate governance rules are being contemplated and the law minister and the Establishment Division would assist the PM's aide in the exercise.
However, in reality, the prevailing laws is not the core impediment to hiring of professionals. To understand the reluctance of the talented people to come forth, who need to venture in the past to find out the real reasons.
In 2013, the PML-N government opted to go for merit- and talent-based induction of professionals to manage the SOEs. M/s Ferguson, a leading HR and financial advisory services company, was hired by the government as head hunters and hiring agents and a panel comprising highly respected members from the private sector was constituted as a selection committee. This was an unprecedented move by any government in the history of Pakistan. This move gave birth to legitimate hopes for the induction of people whose progress is based on ability and talent rather than on class privilege or wealth into the ailing SOEs. But these hopes were shortlived.
M/s Ferguson rolled out an extensive series of advertisements in leading print media to invoke the interest of professionals in Pakistan and Overseas, followed by multiple interviews. The whole process took over an year to complete at a substantial cost to the exchequer. Understandably, the recommendations made by the consultants were submitted to the government. Later, it was learnt that the process of merit-based selection had been aborted. The outcome was the collapse of the already fragile SOEs, including the mega entity Pakistan Steel Mills.
The reluctance of talented people to make themselves available for SOEs is in fact on account of loss of their faith in the hiring process of the government. They rightly view the government's hiring process as a facade to legitimize the appointments of favourites.
Given the precarious state of SOEs, the hiring of a few merit-based professionals will not help the government achieve the desired results unless the whole chain of command is overhauled. This will require the government to wean company board of directors away from the influence of bureaucracy and introduce market-oriented systems and processes.
It is, however, unlikely that the incumbent government will be able to accomplish this task in the remaining period of its five-year tenure.
Also, the government has run out of time to carry out the privatisation of the SOEs as the fourth year of a government's five-year tenure heralds the beginning of election year. During this period politicians adopt a policy of appeasement.
For the government, liquidation of redundant and obsolete SOEs is the viable option. The private sector may be offered - along with entire management control - a 25 percent stake in every SOE showing some signs of a turn-around. This may limit the government losses or bring some money into the exchequer. This is doable in the next two years if aggressively pursued without any further loss of time.
(The writer is the former President of Overseas Investors Chamber of Commerce and Industry)