The gloomy fate of our State Owned Enterprises

Liquidation, privatisation or maintaining status quo? Complex problems related to all three scenarios makes it difficult to find a workable solution

By Shahnawaz Ali

If there is one thing that people remember about the economic policy of the short-lived tenure of Zulfiqar Ali Bhutto, it was the two-wave process of nationalisation. Backed by a socialist rationale, Bhutto’s nationalisation was an attempt of the devolution of power from the hands of the poor into the hands of the public.

It’s been 50 years since the decision was made by Bhutto. Over the years, most of the businesses that Bhutto nationalised, have been privatised once again, but the ones that haven’t, live to serve as a case study of how socialism and the developing world do not go hand in hand.

What, however, cannot be attributed to Bhutto is the current portfolio of Pakistan’s State Owned Enterprises (SOEs). Pakistan has a total of 212 state owned entities, 85 out of which are commercial entities. A recent report published by the World Bank has named Pakistan’s SOE’s as the worst in Asia. Within the coming week, it is also expected that the finance division will table an SOE bill in Parliament. The bill represents the actions proposed in the latest WB report.

To understand how Pakistan decided to use the findings of the WB report to implement a strategy of obtaining a result that would identify what to do with which SOE, we have to go back to the start. Once we do that, we will look at the viability of this strategy itself.

Why are SOE’s a problem?

Since the financial year 2014-15, Pakistan’s SOEs have been in a net loss.

Every year, the loss gets higher. As of FY18, Pakistan recorded a cumulative total of Rs 286 billion in net losses incurred by SOEs. It is important to remember that net losses also account for all the SOE’s that have made a profit. The projections after 2019 are missing in the report but it is no secret that the net profit of the SOEs of Pakistan is still below 0.

The recent World Bank report revealed that Pakistan’s SOEs eat more than Rs 458 billion in public funds annually just to stay afloat and their combined loans and guarantees rose to almost 10 percent of GDP or Rs 5.4 trillion in FY21, up from 3.1 percent of GDP (Rs 1.05 trillion) in 2016. The report deems the SOEs of Pakistan as the worst in Asia.

The “State-Owned Enterprises Triage: Reforms & Way Forward” that was initially published by the world bank and later by the finance division in 2021 states that 90% of the losses incurred by the state owned enterprises can be attributed to the top 10 loss making entities. Hence these “white elephants” is where the problem essentially lies.

Logically, these entities would be concentrated on and would be on the priority list for privatisation however, that is not the case. The proposed solution itself, is what the “triage” is all about.

What is the proposed solution?

The World Bank report highlighted a framework designed to help policymakers make informed decisions about whether to retain, restructure, or divest SOEs based on their strategic importance, financial performance, and social impact.

The proposed framework includes the following steps:

1. Strategic importance: This step involved assessing the strategic importance of each SOE by analysing its role in the economy, its contribution to public policy objectives, and its potential for private sector competition. SOEs that were deemed to have strategic importance would be retained by the government.

2. Financial performance: This step involved analysing the financial performance of each SOE by looking at its profitability, efficiency, and solvency. SOEs that were financially sound would be retained, while those that were financially unsustainable would be divested.

3. Social impact: This step involved analysing the social impact of each SOE by as- sessing its contribution to employment, income distribution, and public service provision. SOEs that had a positive social impact would be retained, while those that had negative social impacts would be restructured or divested. Based on this model that was devised in 2019, and approved in 2021, the result of assessment has finally made its way to the parliament.

Much to the disappointment of a lot of Pakistanis, most of the top 10 loss making entities have not been made a part of the privatisation list in the first phase. The Finance Division has decided to retain PIA, Pakistan Railways, and Pakistan Post along with most of the DISCOs and GENCOs that are expected to be privatised in the “next phase”. Owing to the ongoing political instability in Pakistan, “next phase” often means a halt for the foreseeable future.

But what is it that allows the state to keep these entities, even after them being a complete waste of the fiscal capacity? Loopholes.

Is retention justified for social and strategic importance?

As standardised as the process looks, the whole triage methodology is contingent upon political wishes. Words like triage, and strategic importance often have a convoluted assessment.There is a huge difference between how the world bank defines strategic importance and how it is assessed in this case.

Let us take the example of PIA. In the undying words of businessman and Ex finance minister Miftah Ismail, “The state has no business running airlines and railways.”

What he said almost a year ago, is still etched on the financial statements of the Pakistan International Airlines. The airline made a loss of Rs. 41 billion in the first half of 2022. Even though this was Rs. 16 billion worse than the same period in the previous year, it is important to remember that the net loss in that period was also positive, i.e; Rs. 25 billion. As per the consolidated financial statements of PIA, the airline has its total liabilities in excess of $3 billion dollars.

Similarly, the Pakistan railways has incurred losses in excess of Rs. 150 billion in the last 3 years. And while there is some competition for PIA with other indigenous airlines, Pakistan Railways operates as a sole operator in its sector. So what strategic mission is there to be obtained from these entities? Strategic importance is defined by the world bank by its relation with promoting private sector contribution, with the current pakistani airlines not being internationally acclaimed, and PIA incurring losses for the last 6 years, no social, strategic and financial logic seems to be justifying the retention of PIA.

Even if retention of these companies is accepted as the fate, the current plan also fails to mention an improvement in corporate governance framework after retention. In its article about Pakistani SOEs published in 2021, the International Monetary Fund writes, “Consistent with survey results, an IMF technical assistance mission in early 2020 noted that the corporate governance of SOEs in Pakistan was weak, which may explain—at least in part—the performance of the SOE portfolio, displaying low productivity and efficiency levels”. Sadly the organisations are still privy to pre-colonial frameworks of bureaucracy and are slow to take off with time.

It is important to mention that organisations can hold a strategic importance for the government. Organisations like ZTBL, which are also amongst the loss making entities do play a huge role in agricultural policy. Similar arguments can be made for the Broadcasting corporations or even the DISCOs. But it’s high time the government prioritises the sectors that it can be a part of, and leave the rest until it is not as cash strapped as it is in the current circumstances. The organisations on the privatisation list include prominent entities like Pakistan Steel Mill and OGDCL.

Conclusion:

When it comes to improving the financial health of SOEs, the commercially feasible solution has been privatisation since the last 2 decades. However the willingness to do so by the governments has always been a big question mark. Not only has the issue been politicised, it has had different solutions proposed by different parties over the years.

The PML(N)’s stand on privatisation has mainly been open, however there has been little to no actionable plan to execute their political slogans. On the other hand, the PPP has always maintained a stance akin to Zulfiqar Ali Bhutto’s on nationalisation.

The PTI government, when they were in power, largely went with a trial and error approach. After trying various things, they were finally made to land upon this standardised triage by the IMF. The PDM has shown consistency with the same plan, be it as a policy measure or out of necessity.

The bill being tabled by the PDM, with there being no functional opposition in parliament at the moment, may well be passed. But that is only the first step. As we have seen multiple times before, privatisation is an unpopular move that carries a political cost. Apart from the tedious task of looking for a willing and appropriate buyer, there is the negotiation phase that takes time.

A lot can happen during that. Employees of the entity being privatised can hit the streets, as witnessed under PML-(N)’s last tenure when they moved forward with PIA’s privatisation. Other times, the courts have gotten involved; the Supreme Court disrupting the sale of Pakistan Steel Mills is a case in point.

The WB Triage report method may be something new and perhaps even workable. But it will certainly take more than just the passing of law based on said report to cure Pakistan’s worsening SOE headache. n