White elephants

State-owned enterprises (SOEs) are among the more serious and chronic ailments of Pakistan’s wobbling economy. They are responsible for haemorrhaging around $3 billion in the fiscal year 2010, according to the finance minster’s last budget speech. This amount is two-thirds of the annual defence budget and double the promised annual Kerry-Lugar-Berman assistance to Pakistan. SOEs are a major drain on the country’s budget and devour public resources without any remorse or compunction. These corporate behemoths have been maintained by successive governments to fulfil their own political agendas. Governments have bald-facedly resorted to granting excessive and out-of-merit employment at all levels in these organisations, causing acute inefficiencies and deep-rooted corruption.

Even if, at some places, there are honest people at the helm of affairs, by virtue of their background they cannot run enterprises like business managers. They lack business acumen and are too shy to take pure investment decisions like entrepreneurs. Their promotions or reward system is not linked with business performance. They might be competent in matters related to administration, but political appointments and politicised unions are what they have to constantly manage, instead of applying their minds to making the organisation commercially viable.

The staffing of SOEs is a highly politicised matter. Last year, the government passed a bill to reinstate thousands of employees who were let go by earlier governments, with retrospective benefits. There is no provision for investigating whether those reinstated have found employment somewhere else or if they have established their own businesses. As a consequence, many will reap the windfall benefits at the cost of others who are deprived of livelihood. Regrettably, SOEs that are publicly listed and, therefore, partly owned by individuals, companies, and mutual funds, had no say in this bill even though, under the Code of Corporate Governance, such decisions are to be made by the board of directors. Instead, the costly employee reinstatement decision was made by direct intervention from the majority shareholder — the government. This law will no doubt be a cause of further financial haemorrhage to the SOEs and cripple them in the long term.

Thus, privatisation in a transparent and open manner is the only way to unleash the pent-up productive potential of the nation’s resources and add significant value to those assets. Since the early 1990s, successive governments have pursued significant privatisation programmes but, unfortunately, the process has come to a screeching halt since 2008. Due to Pakistan’s poor image worldwide, foreign investors are wary of investing in the country. Therefore, the government should use the secondary offering of companies already listed in order to generate much-needed funds to reduce state borrowing and curb inflation.

Regrettably, Pakistan, at 10.2 per cent of tax-to-GDP ratio, stands 155^th among 179 nations, according to the Heritage Foundation's 2009 Index of Economic Freedom. Similarly, as per the State Bank, the country’s fiscal deficit by June 2011 is expected to cross 6 per cent of the GDP. Thus, Pakistan has no other option than to create a productive economy that generates sustained economic growth. For one, the recent rollback of the increase in oil prices under political pressure will exacerbate the economic woes of the government. Similarly, the implementation of the reformed general sales tax (RGST) has been postponed till September due to political pressure, but will once again surface when the finance ministry finalises its negotiations with the IMF on extending the country’s loan.

Now that the government has gained some breathing space from political pressures, in the next six months it must deliver on implementation of effective measures for anti-corruption and improving transparency, reducing the size of the cabinet and its expenditures, and introducing the Code of Corporate Governance for SOEs. The appointment of competent boards of directors and professional management will enable these SOEs to function more efficiently and, thereby, pave the way for their privatisation. All these measures will restore the image and confidence of economic managers, who will then be able to gain the support of parliamentarians for tough economic policy decisions — and the media will have success stories to report.

Published in The Express Tribune, January 19^th, 2011.