Heads should roll in the aftermath of the fiasco of the Thursday bidding of Pakistan International Airlines (PIA) as there were ample prior indications that an extremely embarrassing failure awaited the government. The list of indications ranged from there being only the one bidder, with no previous experience in the field, and with an offer too low from the floor price, to patently evident lacunas in the sale proposal as well as in the appallingly poor prevailing investment climate in the country.
Disturbingly though not surprisingly, the government was not deterred from eking out as much publicity as possible, a reflection of a failure to read the writing on the wall, by providing the sole right to broadcast the bidding to PTV, funded at the taxpayers’ expense, rather than on smoothing out the issues.
It is doubtful if the Chairman or any official of the Privatisation Commission or members of the Cabinet Committee on Privatisation (CCoP) headed by Ishaq Dar bothered to read Governor State Bank of Pakistan’s (SBP) annual report (2023-24) dated 18 October, uploaded on the website on 17 October at 23:53, seven minutes before the day actually began, an unnecessary time-shuffle increasingly reminiscent of several other recent governance-related information sharing decisions.
Much has already been written on several aspects of the report, which of course is dated as SBP as well as the Pakistan Bureau of Statistics (SBP) have already uploaded more up-to-date statistics (till end September 2024) but one chapter titled “reforming state-owned enterprises (SOEs) in Pakistan” merits greater consideration especially in the context of the Thursday bidding for PIA.
The report contends that the government suffered a cumulative 5.7 trillion-rupee loss, or 1.4 percent of Gross Domestic Product, courtesy the SoEs over eight years. Effort to reform the SoEs began in the 1980s, the report notes, but the “nature and scope of reforms was not holistic as the success of SoE reform was seen with a limited yardstick.” But what is significant is that contrary to the incumbent Finance Minister Muhammad Aurengzeb’s oft-repeated mantra, supported by pledges to the International Monetary Fund (IMF) under the ongoing programme, the report maintains that “privatisation process was marked by several legal and institutional weaknesses, whereas some privatisation deals also faced transparency and procedural issues due to which public confidence has waned.” This statement is further correctly clarified on two counts. First, there is an overemphasis on privatisation as the single most important yardstick to success, with limited focus on strengthening of competition and regulation. Aurangzeb has repeated time and again that the government must not be in the business to do business, an aphorism that is clearly dated, and reflects the prevalence of a mind-set amongst successive economic team leaders that focuses on the stated theoretical efficacy of a policy rather than undertaking an empirical study of past privatisations to determine their failures and/or successes to learn valuable lessons.
Take the case of K-Electric, privatised nearly twenty years ago, which was budgeted a whopping 171 billion rupees this year under the flawed federal policy of tariff equalization. Thus, unless the tariff equalization policy is amended, the planned privatisation of Nandipur and Guddu power plants will not reduce the budgeted subsidy. It is therefore critical for the government to ensure that regulatory or institutional bottlenecks be resolved in a timely fashion before proceeding with privatisation.
And secondly, the report suggests that monitoring and evaluation mechanism is necessary “to ensure that post privatisation service delivery is not weak (one hopes that not including the word ‘not’ is a typographical error) which is particularly pertinent for SOEs operating in public goods and services sectors.” This implies that the onus would fall on (i) the regulator to ensure that post privatisation delivery is not weak though given the routine complaints by Karachi consumers of K-Electric to the regulator, which remain unresolved to this day, one wonders if such a mechanism is in operation; and (ii) the government may have to step in and in the case of K-Electric it has implied agreeing to provide electricity from the national grid.
The report extols the 2023 SOE Act and Policy, claiming that it is the most comprehensive corporate governance framework so far in Pakistan. This favourable opinion as per the report is premised on identifying specific criteria for categorisation of strategic or essential SOE – a task that remains pending to this day. On 10 July 2024, CCoP under the chairmanship of Ishaq Dar (with the Minister for Finance a member of this committee) noted that 40 SOEs are categorised as either strategic or essential. The decision was to allow respective ministries to submit details to the committee of which SOE they defined as strategic and which as essential, implying thereby that there will be no across the broad standard definition. However, to date there are no further updates by any ministry on this matter.
The SBP report notes the time lag between policy and setting up institutions, weak stakeholder engagement and perhaps most damning of all weak institutional capacity with elite capture weakening institutions as lacunas in sale/reforms of SOEs; and additionally notes that ad hocism weakens decision-making, undermines the autonomy of regulators and argues that the transfer of administrative control to respective line ministries compromises their independence. Such pervasive issues are unlikely to be resolved within a few months, leave alone years.
Disturbingly, the report also rather sycophantically extols the 2023 SOE Act and SOE Policy by: (i) praising the creation of Cabinet Committee on SOEs (CCSOE) notified on 25 August 2024 with defined responsibilities including review of board of directors of SOEs recommended by line ministries before final approval by the federal government. Administration after administration has changed board members, staffing them with party loyalists according to critics, especially when the names are finalized with concurrence of the relevant Federal Minister, with no visible positive outcome in enhanced efficiency or public welfare so far. And inexplicably, in spite of frequent pledges to fast track privatisation, CCSOE has not reportedly met even once; (ii) the Act grants autonomy to the SOE boards with clear provisions that the line ministry will not micromanage the SOE, nor give any direction to perform public service obligations unless mutually agreed and funded for, and monitored – again a salutary objective announced in the past but never implemented; (iii) the setting up of a Central Monitoring Unit under the Finance Ministry that would establish a criterion to undertake a performance review of its directors – a position that mistakenly ignores the prevailing culture of elite capture; (iv) SOEs will have their own HR policy and autonomy over hiring and firing – again persistently compromised due to the prevalence of a culture of nepotism, corruption, and sycophancy; and (iv) the government must ensure competitive neutrality with no SOE allowed to benefit from any unfair competitive market advantage or dominant position by virtue of being an SOE. Some SOEs are clearly more important than others.
To conclude, the turning around of SOEs remains a priority for a very valid economic reason, to reduce the considerable annual leakage from the budget. But unless the pervasive elite capture in SOEs related to employment and procurement activities is surgically removed (that would require punitive punishments rather than simply changing of the guard), reforms in SOEs, including their privatisation, will remain a pipedream.
Anjum Ibrahim, "Privatisation and SBP," Business recorder. 2024-11-04.Keywords: Economics , Privatisation Commission , Investment climate , Taxpayers’ expense , Tariff equalization , Reform , Subsidy , Privatisation , Ishaq Dar , Muhammad Aurengzeb , Pakistan , PIA , SOE , SBP , IMF , 2023 , 2024