Privatize Pakistan's state-owned enterprises: attempts to revive them are futile
https://arab.news/6tkjq
The federal government of Pakistan (GoP) last year submitted to the parliament the ‘State Owned Enterprises (SOEs) Governance and Operation Bill, 2021’ with the stated aim of enhancing the operational efficiency of SOEs and making them financially self-sustaining. The statute is now under consideration by the National Assembly’s standing committee on finance. There can be little disagreement with the overall objectives of the proposed statute to ensure an improved governance framework for SOEs as well as empowering their management teams to deliver better financial performance. The state can no longer afford to continue funding the large losses that the sector accumulates annually, and must limit the risk it poses to the fiscal balance of the country.
According to the World Bank, the total liabilities of chronic loss-making SOEs - defined as public sector corporations that made a loss in three out of the five past years - is in excess of 8 percent of GDP. The top ten loss-makers, which include Pakistan International Airlines (PIA), Pakistan Railways, power companies and the National Highway Authority, account for around 90 percent of the total losses each year. Despite attempts by successive governments to turn them around, they have failed in making these entities even break even. Loss-making SOEs added a further PKR 143 billion in FY 2019 to the overall GoP liability. Even in the case of profit-making SOEs such as the oil and gas sectors, the operational efficiency and profitability compare poorly to their peer group in the private sector globally.
While it is only right that the bill is carefully scrutinized by legislators, it would be irresponsible for its critics to frame their arguments in terms of the law being a diktat of the International Monetary Fund (IMF). A more valid criticism would be that the proposed law does not make it incumbent on the government to expedite their disinvestment and put in place complementary policies that strengthen the regulatory capacity.
The top ten loss-makers, which include Pakistan International Airlines (PIA), Pakistan Railways, power companies and the National Highway Authority, account for around 90 percent of the total losses each year. Despite attempts by successive governments to turn them around, they have failed in making these entities even break even.
Javed Hasan
The economic case for the divestiture of SOEs should not be the urgent need to alleviate budgetary stress, but more fundamentally, to define the role of the state in the economy. This should be to provide an ecosystem that forces efficient allocation of scarce resources and a level playing field for all economic agents. While the intent of reforming SOEs is commendable, history has shown that all such attempts fail despite the best intentions of the government.
Instead, empirical evidence from longitudinal study across countries (JD Brown, JS Earle, A Telegdy - Journal of political economy, 2006) shows that privatization leads to increased productivity of companies that were previously under state control. This has also been true in Pakistan with the privatization of most state-owned banks in the previous decades. Former chronically loss-making public sector banks are now in the private sector and driven by shareholder imperatives to maximize returns. They are not only profitable and contributing to the national exchequer in tax revenue, but have expanded their workforce. As private sector companies operating without state patronage, the banks have focused on maximizing their returns by autonomously coordinating the optimal allocation of resources to improve their own and overall sector’s performance.
In spite of its benefits, governments in Pakistan have been hesitant to embark on an aggressive privatization program because of widespread skepticism about the transparency of the process and lack of clarity about the outcomes. Many Pakistanis believe that the private sector makes profits by unfair means, which stems from a history of businesses extracting rents from the state through a plethora of protective tariffs, preferential loans, subsidies, and special regulations that hamper competition. Unchecked rent-seeking by some businesses has undermined public confidence in the state’s ability to ensure effective regulation to prevent market failures and efficient delivery of services. This in turn agitates public suspicions that divesting SOEs into private hands will only enrich few people without bringing about the benefits of improved choices to the public.
Literature supports these concerns, for example, Saul Estrin and Adeline Pelletier (World Bank Economic Review, February 2018) have shown that for privatization to succeed in generating economic gains in developing economies, the process has to be well-designed and sequenced with complementary policies that pay attention to the strengthening of regulatory capacity. The state and its regulators have to play a critical role in the process by regulating and monitoring the market to promote healthy competition, and step in to prevent market rigging by malign interests.
The era of SOEs has ended globally, including in most socialist countries. Increased participation by the private sector in economic activities that were previously public monopolies has brought about not only intense competition, but has also stimulated innovation and improved service quality for consumers. Similarly, in Pakistan, rather than trying to turn around sclerotic SOEs, legislation should focus more on providing a conducive environment to privatize them rapidly.
— Javed Hassan is an investment banker who has worked in London, Hong Kong, and Karachi. He tweets as @javedhassan. The views expressed in this article are author’s own and do not necessarily reflect the editorial policy of Arab News.
