Restructuring SOEs

Pakistan has a state-owned enterprises (SOEs) problem. The country has had it for a long time. No military or civilian government has been able to resolve it. The question is: why has the Pakistani elite allowed SOEs to become an intractable problem in Pakistan’s economy? Why have SOEs assumed the status of an unsolvable riddle?

More than one-fifth of the world’s large corporations (22 percent) are SOEs. Most of the SOEs are in transport and ‘strategic’ sectors. Pakistan is no different. It has over 100 SOEs in the power, transport, and financial sectors amongst others. SOEs contribute about 10 percent of Pakistan’s GDP and they reflect nearly one-third of capitalisation on the stock market.

Pakistan’s SOEs suffer from heavy financial losses, they provide ‘cost-ineffective’ delivery of services and they have weak structures of corporate governance. The government needs to provide large amounts of subsidies to sustain them. SOEs are a burden on meagre fiscal resources. Over the decades, SOE performance has witnessed a decline in comparison with the private sector and they have suffered mismanagement, corruption and technical incompetence (Aftab and Shaikh, World Bank, 2013; Speakman, World Bank, 2012; OECD, 2018; ADBI, 2017).

As per media reports, the financial losses of PIA, a key SOE, are estimated to be as high as Rs356 billion. PIA incurs Rs2 billion of operational loss on a monthly basis. Another important SOE, the Pakistan Steel Mills’ overall financial loss equals Rs200 billion and it has posted no profit since 2007. The circular debt in the power sector keeps on draining Pakistan’s economy year after year.

The question is: if SOEs are such a drain on the economy, what should be done about them? The PTI government, while approving proposals for the privatisation of some SOEs, delisted the key SOEs (PIA, Pakistan Railways, Pakistan Steel Mills, Utility Stores Corporation, CAA and NHA) from the privatisation list. The government has also announced to create a “sovereign wealth fund” for SOEs. It wants to turn them around, before they could possibly be privatised.

As the literature on privatisation in Pakistan and other developing countries informs us, privatisation is no panacea. It also has an impact on labour due to layoffs. However, one also needs to take into account the welfare implications of heavy government subsidies that the government is pumping into these SOEs just to keep them functional. One needs to estimate how many children, women and men are not receiving education, health, water and sanitation because of the unsustainable losses of these SOEs.

The next question is: what should the government do to turnaround these SOEs that are a heavy burden on Pakistan’s finances? Research (Aftab and Shaikh, World Bank, 2013; Speakman, World Bank, 2012) prescribes certain remedies. First of all, there is a need for legislation in terms of enacting an SOE law in order to establish the grounds for better corporate governance. There should also be a clear SOE ownership policy rather than a diffused overlap of responsibility between various ministries and bodies. Legislation and SOE policy should help the government distinguish its various roles in the SOEs management.

The government’s role as policymaker, manager, provider of subsidy and regulator needs to be separated. There is a need for clear guidelines on appointing the independent board of directors (BoGs) and management of SOEs on the basis of performance contracts. Accountability measures should be able to hold those at the helm of affairs accountable, if they fail to deliver as per their performance contracts. There is a need to develop and monitor delivery according to the key performance indicators; one cannot emphasise enough the need for systematic monitoring and evaluation of SOEs performance. SOEs should be made the autonomous institutions just like the State Bank of Pakistan. Government should not interfere in the running of SOEs.

The autonomous boards of SOEs should inculcate financial discipline and the government should work towards strengthening the legal framework to bring down the financial burden of huge subsidies. Transparent financial and non-financial disclosure practices should be adopted. At present, the ‘poor control mechanisms’ relate to internal audit frameworks, risk management and other internal controls and they need to be changed according to the best practices of corporate governance.

Pakistan should learn from South Korea and Singapore on how to run well-managed SOEs. Malaysia has been able to turn around its SOEs. China is working on turning them into corporations. Even in Pakistan’s case, those SOEs that are listed on the Karachi Stock Exchange (KSE) and follow the KSE’s corporate governance guidelines earn more profits. However, they may not be free from political interference and may not continue to be viable on commercial lines (Aftab and Shaikh, World Bank, 2013; Speakman, World Bank, 2012; ADBI, 2017).

The literature quoted above largely points towards solutions to management problems. However, SOEs in Pakistan are essentially a political problem – like most other issues. The real reason why SOEs are in such a mess is because the elite in Pakistan have not risen above political interference, interest groups, elite capture and patronage politics – all issues well illustrated in political economy literature. SOEs such as Pakistan Steels Mills, PIA and Pakistan Railways are also of a strategic nature. Even the security elite may not want to privatise them, other than the concerns for labour that we all need to be more cognizant of.

However, there is an urgent need for the elite in Pakistan to consider the worst welfare implications of continuing heavy subsidies on the human development of citizens, and work towards viable legislation and policymaking to turn SOEs around. It is time to rise above patronage politics and follow best practices to shun populism and take the hard decisions to restructure SOEs.

The writer is a freelance contributor.