State-Owned Entities (SOEs) continue to be the recipients of large annual budgeted injections in Pakistan and administration after administration has pledged to either initiate restructuring measures with the objective of converting loss-making units into profitable ones through the induction of a competent board of directors and an honest and competent chief executive or to sell the entity right away through offering shares of the company on the stock market or to a strategic buyer.

Irrespective of these salutary pledges the situation today is worse with ever-rising budgetary subsidies/bail-out packages that the government can ill afford.

First a few facts about SOEs as noted in Asian Development Bank technical assistance titled Knowledge and Support (October 2021): in 2019 the SOE portfolio comprised of 119 billion dollars in total assets and $31.5 billion in total equity but generated a return on assets of (-)1.37 percent and a return on equity of (-)5.16 percent. The only sectors in which SOEs achieved positive results were finance, generating a return on assets of 0.70 percent, and promotion and advocacy, generating 0.68 percent.

The three sectors with the largest negative returns on assets were industry and engineering (-6.63 percent), transport (-4.17 percent), and services (-3.04 percent). The losses in the four largest SOEs (Pakistan International Airlines, Pakistan Steel Mills, Pakistan Railways, and the National Highway Authority) totaled more than 3 percent of GDP. The government has continued to provide loss-making SOEs with ongoing financial support, which has also exacerbated the negative impact of the coronavirus disease pandemic on the fiscal position, writes the ADB, adding that loans and subsidies paid to SOEs and funded from the federal government budget totaled 3.51 billion dollars (around 369 billion rupees at the time) or about 1.8 percent of GDP.

So who is to blame? There are about 17 ministries that administer around 212 SOEs with most concentrated in three ministries notably Finance which administers about 30 or so entities, Water and Power which administers around 25 public sector companies (as well as Wapda) and Industry and Production. The bulk of the losses are in the 85 commercial SOEs that operate in power, oil and gas, infrastructure transport, and communication, manufacturing, mining and engineering, finance, industrial estate, development and management and trading and marketing. The World Bank has computed total SOE liabilities in excess of 8 percent of GDP with the top ten loss making units accounting for 90 percent of total losses each year which include National Highway Authority (NHA), Pakistan Railways (PR), PIA, and power sector (distribution companies).

NHA is under the administrative control of the Ministry of Communications with Murad Saeed as the Minister who was recently awarded the best performer shield by Prime Minister Khan perhaps on the basis of roads/highways completed from federal funds rather than on the losses incurred.

Pakistan Railways previously headed by Sheikh Rashid refused to accept blame for several accidents during his tenure which then led to his being given the much more important Ministry of Interior while his successor Azam Swati has been largely silent on performance.

PIA has yet to recover from the losses it experienced subsequent to the announcement by the Aviation Minister Ghulam Sarwar on the floor of the house in 2020, before first carrying out the investigation, that a third of all Pakistani pilots, mostly employed by PIA, have “fake” licences which led to suspension of PIA flights to most countries. The process to restore the flights after reported completion of the investigation has begun though it has been very slow however the airline suffered an incalculable loss due to the Minister’s ill-advised and premature remarks.

Today, the energy sector circular debt is 2.5 trillion rupees (from the 1.2 trillion rupees inherited by the Khan administration), indicative of sustained appalling performance of the sector, which has led to severe liquidity issues in the power sector that, in turn, has continued to disable them from releasing the accumulated 1.2 trillion rupee dividends to the government. The claim by Finance Minister Shaukat Tarin that the Prime Minister’s 28 February relief package envisaging a significant rise in subsidies (with the exact amount unclear as it is dependent on the international price of oil) could well be funded through these dividends is therefore spurious and has reportedly been rejected by the International Monetary Fund (IMF) during the ongoing policy level talks on the seventh review.

The foregoing shows the compounding of the problem due to ill-advised decisions/statements by the Khan administration which accounts for the rise in budgetary support and/or bailout packages for SOEs.

Pakistan People’s Party also followed a flawed policy with respect to the SOEs in using them as recruitment centers for its supporters. While the party’s two former prime ministers — Benazir Bhutto as well as Yousuf Reza Gilani — expressed no regret in following this policy one would hope that valuable lessons were learned notably that an overstaffed SOE would soon face financial difficulties which, if not dealt with appropriately, would lead to high annual budgetary support.

Nawaz Sharif’s government has been hugely supportive of private sector engagement in the SOE sector, either for restructuring before sale and/or outright privatization. The former objective remained unmet as change in the CEOs did not lead to a significant turnaround in any SOE (though Railways did register a decline in losses) while privatization remained stalled due to worker opposition supported by the opposition and/or lack of an appropriate domestic and international climate for sale.

Outstanding liabilities issued on behalf of the SOEs, defined as debt, are rising and the budget for the current year notes that existing guarantees constitute around 6 percent of GDP but “that the government is committed to maintain or reduce the exposure in the upcoming fiscal year” (an IMF condition) but instead the government proceeded to get National Assembly approval to raise the sovereign guarantees from 2 percent (allowed under the Fiscal Responsibility Act) to 10 percent, a fiscally imprudent move.

To conclude, there is an urgent need to undertake reforms though unfortunately restructuring remains a pipedream and privatization is being supported though the climate remains adverse reflected by the failure to privatize any entity. Besides the government is proceeding with its plan to privatize (with reports of the Finance Minister urging greater speed to meet the burgeoning budget deficit) without any regard to sequencing or complementary policies that pay attention to the strengthening of regulatory capacity as advised by Saul Estrin and Adeline Pelletier (World Bank Economic Review, February 2018).

Copyright Business Recorder, 2022