Haemorrhaging money in state-owned enterprises

Govt can improve the situation by following principles of corporate governance

ISLAMABAD: Crises are good news for reforms, and ironically, there is no imminent crisis for Pakistan’s economy that lies ahead.

A dangerous consequence of giving up tough economic decisions is not only that there is no reform; there is also no respite from the prevalent crisis.

As a new report tracking the economic agenda of PML-N seems to suggest, the government is backtracking on most of its pledges on economic reforms. The struggling State-Owned Enterprises (SOEs) is a case in point.

The government provides support to SOEs in five ways: equity injection, subsidies, grants, loans and guarantee on loans.

“Privatisation of state-owned dinosaurs isn’t the sole solution, but the sooner Islamabad can stop haemorrhaging Rs500 billion (nearly $5 billion) annually on budgets, subsidies and bailouts for failing enterprises, the better,” said a recent Wall Street Journal issue.

In other words, the opportunity cost of sustaining these SOEs is almost equal to half the PSDP budget of 2015-16.

As of March 2015, according to the State Bank of Pakistan (SBP), the total outstanding domestic debt and liabilities on SOEs was Rs632.4 billion, up by 17% in last two years, wherein the domestic debt on SOEs rose by 38% and liabilities were reduced by 11%.

Similarly, as of March 2015, the Pakistan government external debt contracted for SOEs stood at $2,424 million, up by 21% in last two years.

This hardly shows any trace of reforms in how SOEs have been managed under the current regime. Instead of curtailing losses, the government is only contracting more loans to sustain these enterprises.

PRIME Institute 5th tracking report does not give even a passing score to PML-N on SOE reforms. In 2013, the score was 40%; in 2015, it is 36%.

Given the political fall-out from outright privatisation of certain SOEs, the government can also improve the situation by following the principles of corporate governance. However, more often the government has chosen to ignore these principles.

Previous solutions

The government has often resorted to direct intervention by removing and appointing CEOs in some of these enterprises. In November 2014, in the wake a major power breakdown, the federal government removed the National Transmission & Dispatch Company managing director.

This decision was challenged by a board member in Islamabad High Court (IHC). Eventually, on July 12, 2015, in a landmark decision, the IHC accepted the petition and upheld a fundamental principle of corporate governance: independence of the board.



The IHC also termed this decision ‘illegal’ and ‘ultra vires’ to the Companies Ordinance 1984 thus restraining the government from what it termed as an illegal intervention.

This has not happened for the first time. In 2013, when Corporate Governance Rules for SOEs were first notified, the federal government had removed the CEO of Lahore Electric Supply Company. When the decision was challenged in the Lahore High Court, the Chief Justice reinstated the CEO citing corporate governance rules of independence of boards. Thus judicial response seems to have blocked political intervention in the SOEs.

Over accountability is not ‘reform’

One of the fundamental objectives of corporate governance is accountability. Many SOEs suffer do not from lack of accountability; rather from an excess of it. Overkill accountability is a sure disaster.

In a new study on SOEs, Naveed Iftikhar brilliantly puts it: “The multiplicity of accountability checks in case of SOEs including ministerial controls, parliamentary oversights, investigation agencies, judicial scrutiny, media investigations, regulatory agencies and other transparency checks also enhances operational inefficiencies and creates confusion about public sector company’s strategies and policies.”

Increasing layers of accountability does not amount to reforms. The public servants appointed to run SOEs spend most of their time thinking about how to escape any accountability, even if they have done nothing wrong. They understand that the cost of omission is less than cost of commission, and hence they never take any initiatives.

State hand-outs to sustain SOEs amount to welfare populism and as figures quoted earlier, this government is increasing its hand-outs. Welfare populism ultimately destroys the economy - that should be well understood. But it also destroys basic human values of pride, self-respect and hard work.

The writer is Founder and Executive Director of PRIME Institute, an independent think tank in Islamabad

Published in The Express Tribune, August 10^th,  2015.

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