State-Owned Enterprises (SOEs) are business enterprises across the globe which are created and managed by the governments of various countries. Currently, there are around 1500 state-owned multinationals in the World, having more than 86,000 wholly/partly subsidiaries. One-third of them are located in the European Union while more than 50 percent of them are owned by emerging economies. For instance, 18 percent are owned by China, five percent and four percent are maintained by Malaysia and India, respectively. They contribute approximately 10 percent of the world’s GDP besides creating employment. Also, they account for one-fifth of the World Market Capitalization.
The Share of SOEs among the World Largest Companies was 22.8 percent in 2015. The World’s 10 biggest oil-and-gas firms, measured by reserves, are all state-owned. The common rationales for SOEs are, thus, commercial activities, state public policy objectives or strategic objectives along with some instances of natural monopolies. Pakistan is no exception in this regard. Pakistan has around 200 SOEs which are engaged in sectors like energy, transportation, finance, engineering, hydrocarbons, services etc. However, majority of them are running in losses despite their modest contribution to the Gross Domestic Product (GDP) and employment generation. A variety of reasons like mismanagement, operational inefficiencies, corruption and vested interests, bad infrastructure, frequent political intervention etc. are commonly held responsible for the losses on these SOEs.
SOEs in Pakistan contribute about 10 percent to GDP and employ 0.5 million people, with around 28 percent of market capitalization. However, the losses of these SOEs are major concerns in the budgetary allocations. For instance, during the PPP’s administration the average losses were around Rs. 400 billion per annum. Likewise, during the period of the previous government, the average annual losses rose to more than Rs. 900 billion. According to the State Bank of Pakistan (SBP), in aggregate, these SOEs consumed Rs. 1.3 trillion of taxpayer money as their total debt and liabilities rose by 23.5 percent in 2018. The total debt and liabilities of these SOEs constitutes as 3.8 percent of the country’s GDP.
Pakistan International Airline (PIA) and Water and Power Development Authority (WAPDA) alone are eating Rs 277 billion in fiscal year of 2018. The debt on PIA has been on the rise due to its running expenses as well as its leasing of new airplanes. In case of WAPDA, the organizational inefficiencies are considered as the major reasons for the debt accumulation. Likewise, the total debt of Pakistan Steel Mill (PSM) is Rs 43.2 billion at the end of financial year 2017-18. The irony is that PSM is not operational for two years. In addition to PIA, WAPDA, and PSM, Pakistan Railways (PR), Utility Stores Corporation (USC) etc. are the major drain on the Pakistani economy. Collectively, all of the remaining SOEs have a debt burden of around Rs. 748 billion.
Thus, the government is spending a sizable amount on these SOEs, increasing the country’s debt and reducing allocations for the social sector. Reforms are the need of the hour in order to cover the losses on these SOEs. There are three alternatives in this regard. The conservative approach asserts that let these SOEs be state-owned and run them efficiently on the pattern of corporate sector. However, the successive governments failed to achieve this objective due to three problems.
First is the knowledge problem which implies that the decision makers in these SOEs are unaware of the dynamics of the market mechanism. Consequently, SOEs are badly managed and, hence, incur losses. Second is the incentives problem which suggests that the incentives of executives in these SOEs are not aligned to the overall performance of these SOEs. The result is corruption and rent-seeking on part of the managers of these SOEs. Finally, frequent political intervention results in abrupt changes in the administration of these SOEs which, in turn, have inverse consequences for decision-making in these organizations.
Privatization is another alternative for SOEs, especially for those which are running in losses. The general perception is that private sector can manage corporations more efficiently due to its profit-oriented and innovative approach compared to the state.
In Pakistan, privatization started in 1991 with a view to pay foreign debt and alleviate poverty. However, none of these objectives have been achieved so far, despite some partial privatization in some sectors. The reasons are irregularities, lack of transparency, and corruption in the process of privatization. Moreover, complete privatization is obstructed by the vested interests in some cases. For instance, the instances of PIA and PSM are in front of us in this regard.
During the PPP’s administration the average losses were around Rs. 400 billion per annum. Likewise, during the period of the previous government, the average annual losses rose to more than Rs 900 billion. According to the State Bank of Pakistan (SBP), in aggregate, these SOEs consumed Rs 1.3 trillion of taxpayer money as their total debt and liabilities rose by 23.5 percent in 2018. The total debt and liabilities of these SOEs constitutes as 3.8 percent of the country’s GDP
The third alternative for SOEs is that the government could keep assets of the public sector enterprises, rent them to private-sector companies for management. Another shape of this alternative is the mixed ownership and management structures where the ownership and management of these corporations are shared among the state and private shareholders. This alternative is quite successful in many countries like China, Malaysia and other emerging economies.
For instance, in China, with the adoption of the Company Law in 1994, SOEs are transformed into corporate firms with joint ownership and management structures, resulting in higher role to market mechanism, competitiveness, and operational transparency. Consequently, SOEs in China are contributing around 30 to 40 percent to GDP and 20 percent to China’s total employment.
Thus, to achieve organizational efficiency in SOEs, Pakistan should adopt the approach of China. Alternatively, the ownership and management in these SOEs should be jointly shared by the state agents and private sector. In this way, we can proceed with the gradual privatization of the enterprises which are running in losses. Second, we should attract private investment in key sectors like energy, steel, aviation, rail etc. However, to attract investment in these SOEs, we should have transparent regulatory framework along with efficient contract enforcement mechanism. Third, we should have transparency in the selection of Chief Executives Officers (CEOs) of these enterprises.
A simple mechanism in this regard is to make induction from the market instead of having traditional bureaucracy. Likewise, we should have competencies in the Boards of these SOEs which again can be ensured by making professional selections.
Finally, the decision making in these enterprises should be autonomous from political intervention. In other words, it should be the exclusive right of the Board of Directors of SOEs to take decisions with regard to the initiatives, operations and marketing of these units. These guidelines can transform the SOEs into profit-making entities.
The writer is an Associate Professor at the Pakistan Institute of Development Economics and can be contacted at Email: [email protected]
Published in Daily Times, November 29th 2018.