Are SOEs delivering the desired social outcome?
PHOTO: FILE
State-owned enterprises (SOEs) appear to be an enduring feature of the economic landscape of any country. Globally, SOEs are an influential and growing force. This is evidenced by their increasing proportion among the Fortune Global 500, rising from 9% in 2005 to 23% in 2014.
Countries have used SOEs as tools to better position themselves for the future in the global economy, given the increased global competition for finance, talent and resources. But what exactly are SOEs?
While definitions vary, SOEs are generally defined as (1) individual entities; (2) being controlled by a government unit to some extent; and (3) being market producers, providing goods to the market at economically significant prices.
The government’s ownership can have advantages in the form of furthering social outcomes, providing physical infrastructure and creating stability in times of crisis both within and across supply chains.
More generally, the rationale for an SOE’s role in the economy can be grouped into six categories; (1) to support the national economic and strategic interests; (2) supply goods and services; (3) support social objectives; (4) ensure continued national ownership of enterprises; (5) perform business operations in a natural monopoly setting; and (6) create a state-owned monopoly, where market regulation is deemed inefficient.
Besides this, the historical context also plays a key role in why SOEs are under state ownership. Moreover, their rationale can also be explained by countries adopting a developmental model based on strong state intervention across most economic sectors.
In some cases, the nationalisation of state assets has resulted in SOEs. What is the role of SOEs in Pakistan and what can be done to weather the challenges and improve performance?
SOEs and Pakistan
A 2021 report published by the country’s Ministry of Finance provides a snapshot of the federal-level SOE landscape as of the end of FY 2018-19.
In total, there are 213 federal-level SOEs operating in various economic sectors. This is disaggregated into 85 commercial SOEs, 44 non-commercial SOEs (trusts, universities, training institutions and welfare funds), and 84 subsidiaries of commercial SOEs.
While SOEs can further social and welfare outcomes, they can also destroy value if best practices in the ownership and management are not applied.
Taking the case of Pakistan, SOEs suffer from poor performance and constitute a significant fiscal burden for the government.
Recent data from the State Bank of Pakistan (SBP) shows that the debt of public sector enterprises form a substantial 12.7% of GDP in September 2022, exhibiting a 1.5% year-on-year growth.
Amongst these, the debt of the Water and Power Development Authority (Wapda) and Pakistan International Airlines Corporation (PIA) hold a sizable share. However, it is important to recognise that SOEs should not be evaluated purely on the basis of financial results, but also on how they contribute to societal value creation.
It is imperative that SOEs be actively owned, managed and have a clear purpose and mission. A recent PricewaterhouseCoopers (PwC) report stated that active ownership and management entails the 4Cs: clarity, capacity, capability and commitment to integrity.
In regard to this, Pakistan underwent a major privatisation episode during the 1990s to transform the system from being over-regulated and inward looking into a more open, deregulated and market-oriented economy.
Privatisation was also carried out with the motive to reduce the fiscal burden and increase efficiency of the inefficient public sector enterprises.
However, it is imperative that SOEs still under the government ownership have a clear purpose linked to their desired social outcomes. In addition to this, the government’s ownership stake in SOEs should be monitored and evaluated on an ongoing basis to ensure that value continues to be delivered.
The writer is a doctoral candidate at the Bartlett, UCL
Published in The Express Tribune, January 9th, 2023.
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