Wealth fund for a poor country

The government is planning to create a ‘wealth fund’ to turn around loss-making state-owned enterprises (SOEs). The PTI’s election manifesto also outlined a number of steps in this regard such as corporatisation of SOEs and transferring their ownership to the wealth fund, appointing non-political and autonomous boards, signing performance contracts with agreed KPIs, selecting outstanding professional CEOs on merit, offering performance-linked compensation and committing to zero political interference. If the proposed wealth fund can make all of this happen, it will indeed be a remarkable achievement.

However, what the government is trying to set up is not a wealth fund and rather a holding company. The problems that the government is trying to resolve are related less to the form and more to the substance. And the KPIs that the government is looking for are already there in many cases.



The biggest sovereign wealth funds are owned by the Saudi Arabia, Kuwait, the UAE, Norway and China. These are state-owned investment funds created through surplus wealth. Pakistan, with a serious balance of payments crisis and a constrained fiscal space, definitely does not belong to this league.

To manage SOEs, many countries use holding companies, like Temaesk of Singapore, Khazanah of Malaysia and Crown Entity of New Zealand and that is perhaps what the government is looking for.

In Pakistan, the federal government has equity in 200+ commercial and semi-commercial organisations. Most of these are making heavy losses, costing more than Rs1 trillion a year to the government exchequer, in the form of direct fiscal transfers, subsidies to end users, sovereign credit guarantees and other heads. Ironically, such generous financial support at the expense of taxpayers’ money comes without any performance conditions to improve.

Most of these SOEs are run like government departments ripe with inefficiency, corruption and patronage, resulting in growing liabilities, accumulated losses and poor service delivery to the citizens. Years of mismanagement have taken their toll in terms of eroding infrastructure and excessive and politicised labour with outdated skills.

Creating a holding company for Pakistan may not be a bad idea, but to turn around these loss-making SOEs, the company will need investment, which in turn would require fiscal transfers, equity injection or new sovereign credit guarantees. What remains unclear is that in the wake of existing fiscal crunch, how the government is going to create that fiscal space.

More importantly, most of these companies even now operate under seemingly independent boards that often conveniently succumb to political pressures. Wouldn’t we have similar people on the board of this holding company too, facing the same pressures? Many attempts in the past to turn around or privatise these SOEs fell victim to political pressures. How will the new holding company be better positioned to take tough political decisions?

And while bureaucrats and technocrats keep on talking about fancy performance framework and KPIs, they don’t realise that for public companies, stock price is the biggest KPI and an easy and clear metric of performance.



Let’s consider the case of PIA. Don’t we all know that the real problem to fix is the 14,000-strong workforce and an employee-to-aircraft ratio of nearly 450, which is almost four times as high as that of Air India? Do we really think that the new wealth fund will be able to somehow make the downsizing decisions easy? PIA’s share was four times as high as the current price 14 years ago. Do we still need some new KPIs to better understand PIA’s dismal performance?

The fact of the matter is that we do not require a special holding company and instead need political will. Establishing the fund will be the easiest part but manifesting that political will is going to be the real challenge and that is what the government needs to think about.

Published in The Express Tribune, November 13^th, 2018.

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