White elephants

Published: January 18, 2011
The writer is the country director of the Centre for International Private Enterprise

The writer is the country director of the Centre for International Private Enterprise [email protected]

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 155th 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 19th, 2011.

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Reader Comments (10)

  • Humanity
    Jan 19, 2011 - 3:51AM

    You mean PIA and its ilk ??Recommend

  • Hamid Wattoo
    Jan 19, 2011 - 10:32AM

    Good piece. But sucess stories would remain a far cry. The reason are our rulers who are there to rule us, not to govern the country because that would require some sane approach which is hard to come by in them. For the time being, let the media relish more juicy pieces even if they are failure stories for all of us. Recommend

  • Shakeel
    Jan 19, 2011 - 11:54AM

    As if the selling of national assets during Zia era at dirt-cheap prices wasnt enough, now we have a plethora of ecomonics-savvy intellectuals starting another campaign for selling the state-owned means of production to the exploiting capitalists and moneyed class and usher in a more strict reign of exploitation of the working class under the yoke of economic slavery. Have mercy on this (always) over-worked and under-paid nation please.
    Historically, morally, religiously, and logically-ownership of means of productions, be those factories, enterprises, or agricultural lands, is devastating for the nation and so for the country. It leads to concentration of wealth in a few hands while the while nation starves for two square means a day.Recommend

  • Jamal
    Jan 19, 2011 - 12:18PM

    Economic reform process which was stopped by this government should start. Only private corporations can help economy progress. Running business is not Government’s business. Government should only focus on providing level playing field with practical economic policies. It should reduce its burden and sell these white elephants. In the short run, this will cause some unemployement for their party workers, but in the longer-term, improved efffeciency will benifit the economy at large. How unfortunate that people fail to understand this simple process!Recommend

  • Saad Duraiz
    Jan 19, 2011 - 2:54PM

    Brilliant article sir! Last year I wrote an analysis of Capital Market reforms in Pakistan for the Ministry of Finance. One of the recommendations was the privatization and listing of SOEs, which would expand market capitalization; enabling the market to become more resistant to shocks amongst other benefits. Recommend

  • Yaseen Baig
    Jan 19, 2011 - 5:16PM

    A good commentary on SOEs…..But i don’t think privatization is the only answer for two reasons.
    1)..In first privatization can become a success story if we have constituted some pre-requisite measures….like code of corporate governance you have mentioned etc to improve the accountability, to check the rampant corruption and to strengthen the confidence of professionals. if we have failed to devise a proper watchdog then privatization can loss $40 bn in a one fiscal year as the case of India is in front of us. Indian investigation officials have submitted a report mentioning that state has been hemorrhaged by almost $40bn in Telecom scam and other cases.
    2) we have also an example of Karachi electric supply …. that was given to a gulf group with a huge sum of state money in advance to update its certain units, but progress is in clear to every one.

    In real we have left the matters between state and SOEs in totally blank to our people. the need is to push governments to be more clear about these enterprises and there must be a legislation about the affairs of these corporate behemoths.then will the the difficult time for governments to politicize these enterprises…Recommend

  • well done
    Jan 19, 2011 - 6:48PM

    infact ruler sick, not state owned enterprisesRecommend

  • Ursani
    Jan 19, 2011 - 9:30PM

    Sir totally agreed with your view point. The only thing which should be ensured is transparency while privatizing SOE’s. We have witnessed a bid of Rs 12 billion for Steel mill’s which was even less than the inventory it was maintaining at that time. And not to forget the 4500 acres of prime land which was not found worthwhile to be included in the valuation of the mills.Recommend

  • Jan 22, 2011 - 6:39PM

    The matter is of extreme concern for all of us, specially country’s citizen who pays tax on a regular basis. You have rightly pointed out that government is now little relaxed after addressing the recent political turmoil and they should now focus on deteriorating economy and MUST deliver. They have a very capable finance minister in the cabinet who, I am sure, looking at the few good economic indicators such as increased exports and imports and foreign reserves which is touching the record highest in the history. I fully agree with your views to privatize these WHITE ELEPHANTS, there is no other solution left.Recommend

  • Singh
    Feb 18, 2011 - 10:23PM

    @Yaseen Baig

    Privatization didn’t loss 50 billon dollar.Corruption is inherently ingrained in india.

    But private companies comparatively only resort to corruption at higher level(to win license tender .to lobby government to bend some rules),its totally transparent at lower and managerial level.

    on the other hand,SOE are corrupt at each level(clerk to general manager of state owned public units are corrupt,inefficient).Recommend

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