Singapore Airlines and Thai Airways are Public Sector Enterprises (PSEs) just like our national flag carrier - the Pakistan International Airlines (PIA). Apparently, the ownership structure of PIA and these airlines may look similar but actually the real difference lies in the corporate governance, style of management, empowerment, attitude to customer services and results.
The assertion is backed by a strong body of research that emphasises the importance of ownership on firm performance. Across the world, it has been shown that many family owned businesses perform poorly compared to professionally managed companies. Successful companies have a strong set of governance structures that are transparent and independent. They have strong professionally managed Boards and merit based managements insulated from exogenous influences. A successful PSE reform ideally needs to encompass the above mentioned structures to turn them around.
To improve the efficiency and performance of the PSEs, the government is following a roadmap for restructuring with the ultimate object of making them commercially viable entities. Reform of PSEs in Pakistan is essential as they account for a sizeable share of the country's GDP and employment and they contribute a considerable portion of direct and indirect taxes. They also continue to serve key socio-economic objective of the state. Based on the experience of other developing countries in successfully turning around loss making state-owned enterprises, the centre-piece of these reforms has been improving corporate governance of these entities.
In order to improve corporate governance of key PSEs, the mainstay of the restructuring model has included restructuring the Boards of PSEs, inducting professional management including chief executive officers (CEOs), chief financial officers (CFOs) and key managers, developing viable policy plans, and ensuring their proper implementation. Implementation and monitoring strategies of the reform measures were overseen by the Cabinet Committee on Restructuring (CCOR).
The first task was to curtail the constant haemorrhaging in the PSEs. Accordingly, the main focus of the government was to revitalise their operations which had touched a minimal level. Prioritisation of PSEs was undertaken considering the size of drain, potential impact on economy and strategic importance. Pakistan Steel Mills (PSM), Pakistan Railways (PR) and PIA were the prime candidates. PSM had reached the lowest level of capacity utilisation of 19 percent, while the PR only had 100 locomotives operational out of a total pool of 500. PSM was making profits up-till 2008 but went into the red subsequently due to rising cost of iron ore and a declining market demand. The CCOR has approved the implementation strategy for improvement of corporate governance and oversight of PSM and its board has accordingly been reconstituted and a new CEO has already been appointed to steer the reform process. Under this plan, a financial bailout package of Rs 14.6 billion has been sanctioned - comprising Rs 13.6 billion through sovereign guarantee and Rs 1 billion interest-free loan. The new business plan of PSM is focused on maximum utilisation of capacity to achieve a break-even point. Smooth availability of raw materials to PSM is being ensured to curtail losses and improve future profitability. The GoP has extended five bailout packages to PSM amounting to a total of Rs 47.32 billion starting from 2000 to date. The major component of these packages has been the provision of subsidised credit in the form of government/ sovereign guarantees, to improve the capacity utilisation of PSM and ensure smooth operations during times of difficulty.
The board of PR has also been reconstituted with involvement of high calibre professionals. CCOR has finalised its restructuring framework. Repairs and addition of locomotives have been prioritised for improving revenue generation and restoration of rail services based on commercially-based package of Rs 6.1 billion. Freight operations are being given preference. It is envisaged that pricing will be determined in future according to market conditions and cost of conducting business. An asset management company has been established for optimum utilisation of PR's assets. Private sector involvement is being encouraged and some trains being run under Public-Private Partnership. Financial viability is being pursued through improving revenue and support by the government through a grant of Rs 28 billion and allocation of Rs 15 billion from the Public Sector Development Programme. PR has earned revenue of Rs 14.8 billion in 2011-12 and a similar position is expected in FY 2012-13. It would be pertinent to mention here that the GoP has provided a grant of Rs 170 billion and PSDP funds of approximately Rs 70 billion since 2000, to ensure provision of affordable transportation services to the masses. The PR continues to provide services in key passenger traffic corridors across the country.
Under the restructuring agenda for PIA, cost minimisation and revenue enhancement measures are being put in place to reduce revenue-expenditure gap in the medium-term. Route rationalisation, code sharing and alliances are being pursued with a view to moving towards a new business model. Financial restructuring plan includes rollover of loans and government guaranteed loans among others. Up-gradation of the fleet is being planned. Dispatch reliability will be improved through various initiatives including expansion of reliability system, use of reliability tools and strategic business units. Rationalisation of expenditure including trimming the top management, stopping pilferage and implementing merit-based system as well as identification of new revenues streams is being put in place. The national carrier has been incurring losses since 2005 mainly on account of ageing fleet, rising fuel costs and adverse movement in rupee dollar parity. The GoP has injected equity amounting to Rs 23.6 billion since 2002 to date, guaranteed local currency and foreign currency borrowings of Rs 115 billion as on June 30, 2011; converted debts amounting to Rs 19.6 billion into TFCs (Rs 12.8 billion) and Sukuk (Rs 6.8 billion) and picked up its interest for five years. The Government also released funds of Rs 2 billion and Rs 6 billion during the year ended in FY09 and FY10, respectively.
The fact that the direct benefits in service delivery and improved tariffs brought about due to the reform measures for above PSEs may not be directly visible to public at large, but if matters had been left as such, the situation would have been much worse. Experience of successful reforms of state owned enterprises across the developing world shows that tangible results in terms of improved performance outcomes become apparent only over a medium term horizon. In neighbouring India, it took 7-8 years to turn around the Indian Railways, which was at the verge of bankruptcy in 2001, into a profitable entity. It needs to be appreciated that in Pakistan's context, a step in the right direction has been taken, while at the same time, it is important to realise that the momentum of the restructuring and reform process must be maintained consistently to achieve concrete results in the near future. The vision 'moving forward' should include the formulation of an objective framework for determining fitness of a PSE for eventual privatisation, public-private partnership and disinvestment.
The plan for reformation of PSEs requires cognisance of the differential in operative structures among the corporate, government departments, autonomous and semi-autonomous bodies. The reform efforts have to focus on establishing clear demarcation between the roles of government in policy formulation, regulation and operation of PSEs. As majority shareholder, the government is responsible for monitoring key performance indicators. There is also a serious need for strengthening the overall regulatory infrastructure in the country to improve the quality of regulatory oversight.
The reform agenda for enterprises to be retained by the government in pursuance of several social objectives should encompass introduction of stand-alone legislation on governance and operation to provide transparent policy guidelines. Hybrid arrangements of establishment of PSEs need to be phased out. PSEs registered under Companies Ordinance 1984 have to adhere to applicable clauses including full autonomy and independence of Boards for policy and oversight otherwise PSEs may be retained as autonomous bodies under ministries/divisions. Nomination Commission/ Specialised Unit has to be established for appointment of Directors in PSEs and database for performance and accountability of directors must be developed. A central oversight mechanism is recommended to be developed for continuous performance monitoring and advisory on management of PSEs. Public Service Obligation and Commercial services may be separated in accounting framework and employees of PSEs may not be treated as civil servants. Lastly, participation of private sector in PSE's operations should be enhanced to make them competitive entities.
(The writer is Director General - Economic Reforms Unit, Ministry of Finance)