SOE reforms: missing link to economic revival

Long-overdue reforms of underperforming SOEs are essential for Pakistan's economic growth; privatisation decisions ca

KARACHI:

The much-delayed reforms to fix the working of Pakistan's crippling state-owned enterprises (SOEs) are the missing link to a bright future for the country and a key to making the domestic economy sustainable and successful. The decision to privatise them or retain them under government ownership should come later.

The failed attempt to privatise the national flag carrier, Pakistan International Airlines (PIA), at an attractive price suggests Pakistan can no longer afford to allow SOEs to underperform, nor can it sell them off at throwaway prices to the private sector.

According to a special chapter on SOE reforms in the State Bank of Pakistan (SBP) Annual Report FY24 on the State of Pakistan's Economy, bailout packages and subsidies to SOEs have surged to a staggering Rs5.7 trillion, or 1.4% of GDP, over eight years (FY16 to FY23). A large chunk of the financial aid, directed mainly toward sectors such as power, infrastructure, transport, and information and communication technology (ICT), has exacerbated the financial burden on the government.

PIA, Pakistan Railways (PR), and the National Highway Authority (NHA) remain among the top companies discussed whenever there is debate on loss-making SOEs.

The loss-making companies consume so many financial resources from the state that they offset the profits earned by profitable SOEs like the State Bank of Pakistan (SBP), oil and gas exploration companies (E&P) such as OGDC, PPL, POL, and the oil marketing company Pakistan State Oil (PSO), among others.

The ever-increasing financial burden on the government signals a strong call for long-overdue SOE reforms that the ruling coalition has already initiated recently. The concern is that reforms have been launched many times in the past but have never reached a successful conclusion.

A strong will is required from the government, along with political stability in the country, to achieve a successful outcome. In the absence of such critical developments, experts argue that governments—from the top federal level to the bottom of local government levels—must end their policy of using SOEs as sources of jobs for their political supporters. Jobs should be provided on merit.

Additionally, there is a significant need to eliminate corruption in SOEs through sound policymaking. Two major changes could take place by appointing honest leadership based on merit in SOEs and involving private-sector professionals on their boards of directors. This would mean establishing public-private partnerships (PPP) to manage SOEs professionally rather than politically, thereby turning them profitable.

The rest of the required reforms—such as transparency, accountability, staff training, and technology updates—are byproducts of honest leadership and the government ending political interference in SOEs.

Right-sizing through eliminating thousands of jobs, as seen at Pakistan Post Office (PPO), and winding down the oversized industrial complex Pakistan Steel Mills (PSM)—which was profitable until 2008—represent collective failures of the nation. Reducing the workforce is not a viable solution.

Iran has reportedly doubled the production capacity of its steel complex, established alongside Pakistan's PSM in the early 1970s with the same Russian technology.

What happened to the 2020 proposal to transform Pakistan Post Office into a full-fledged financial institution from its current limited role, with operations at 10,500 locations across the country? Instead, the removal of thousands of jobs at the organisation is contributing to the country's rising unemployment rate.

Meanwhile, companies in the private sector, like Engro Fertiliser, Lucky Cement, and Mari Petroleum, have diversified into new ventures, including LNG import terminals, mobile tower management, the car marketing business, and electronic vehicle (EV) charging. Cement makers have set up large solar power plants to reduce energy costs, and private-sector banks are transforming into technology firms in Pakistan. This begs the question: what prevents SOEs from venturing into new businesses, like PSO did by becoming an LNG marketing firm?

The answer lies in inefficiencies and a cumbersome decision-making process at SOEs, both of which are linked to political interference. The SBP's comprehensive report notes that while changing ownership through privatisation has been the most common reform strategy worldwide, evidence shows that competitive markets, transparency, monitoring, effective regulation, and sectoral policy reforms, along with good corporate governance, are more critical than ownership changes.

Indeed, there have been cases where privatisation failed or otherwise did not yield the desired results. At the same time, some of the world's largest companies remain effectively under state control, with a notable trend of cross-border investments by multinational SOEs owned by emerging markets and developing economies (EMDEs).

These exceptions notwithstanding, research suggests that SOE reforms, which began in the 1980s and peaked in the 1990s, were largely completed by the early to mid-2000s in most countries and regions worldwide. However, in some countries, including Pakistan, SOE reform is still an unfinished agenda.

By the end of FY23, there were 121 federally owned SOEs in Pakistan, of which 73% were commercial and the rest were non-commercial, serving various types of sectoral development needs.

THE writer IS A STAFF correspondent