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State-Owned Enterprises: Hard to swallow, harder to spout

The prevalent view, informed or not, is that State-Owned Enterprises (SOEs) are bad news. They are perceived to be inefficient, anti-merit, and prone to cronyism and graft. They have a ‘hemorrhaging effect’ on the budget. ‘Government has no business doing business’ is the rallying cry of those opposed to SOEs. They want to see the state as promoter of free enterprise, not its competitor.

The state, they feel, can best ensure its welfare function by creating an enabling environment for business; the larger public interest objectives can be secured through State’s regulatory and taxation powers.

Literature does not find a structurally adversarial relationship between State ownership and performance. There are enough SOE success stories from around the world to establish that.

Indeed, one could argue that a tilt towards state capitalism is gaining traction as the debate on the malignant aspects of laissez faire economics intensifies.

In Pakistan the debate has become somewhat ideological – you are either for or against privatization; deaf to the contrary point of view. (Interestingly, no political party’s manifesto has a pronounced pro-privatization position!)

The Privatization goal posts have now been marked by IMF. The government has programmed privatization of seven SOEs, and has agreed to two ‘structural benchmarks’: fresh audits of PSM and PIA by December this year, and triage determination (what to sell, liquidate, retain) by September 2020.

IMF also wants the government to submit to the parliament, by September 2020, legislation to “clearly define the role of the State as owner, regulator, and shareholder”.

If followed, the IMF prescription will put an end to our privatization debate – at least until we dance together.

Insufficient managerial autonomy (including a less than fully empowered Board) is generally touted as the principal cause of SOE failure. The theory is that a hemmed-in management is the flip side of political intrusiveness, and all the ills that come with it.

Asad Umer sought to cure this through the Sarmaya Company. The idea was to insulate the management from pernicious political influences. Good thinking, but can you seriously expect the owner to hand over the keys to the management – especially when the owner happens to be the government?

One will readily grant that SOEs should be ring-fenced against becoming the government’s handmaiden; to serve its political agenda, or worse, become a vehicle for political patronage. Arguably, the Sarmaya Company will manage this, if that is the extent of its ambition.

The more pertinent question is if managerial autonomy, necessary as it is, is mission critical? Will a fully empowered management fix the likes of PIA or PSM? Or is it only one of the issues, arguably peripheral in the larger context, that restrains SOEs from turning around?

Take the ‘naya’ PIA. It now has a dynamic leader at the helm; in his authority and rank reminiscent of Nur Khan who is credited with taking ‘purana’ PIA to stellar heights. The new Chief Executive has also been given a free hand by the government that he is using to good effect to bring about the badly needed reforms.

The winds of change are there. You can see how corporate culture is changing: from attendance and punctuality to use of medical facilities; and there is zero tolerance for indiscipline. The company is no longer being ‘taken for a ride’ by pilot or union power.

Postings and transfers are merit-based, and the ‘politically well connected’ have been wrenched away from their plum postings to get a taste of the tundra. From check-in staff to cabin crew one sees improved standards of courtesy and service. Even food quality has improved!

That said, over the last one year PIA’s accumulated losses have grown by another 104 billion rupees. Despite the improvements few look upon PIA as airlines of choice. Competition continues to bite into PIA’s market share, with no respite in sight.

Over-employment is readily cited as PIA’s Achilles heel. Undoubtedly, PIA has a bloated workforce; but would PIA soar if its workforce was cut by half? Most experts agree PIA’s vulnerabilities extend far beyond manpower quality and quantum.

Good management can address issues like network analysis, route selection, and leveraging the large customer base that Pakistan offers. It can perhaps also live with the open skies policy.

The real issue – above the obvious one of fleet modernization – is gauging PIA’s assets, its real worth? Its liabilities are well known, but what does it have to ‘sell’ -other than an ailing fleet and sub-par maintenance infrastructure? Routes? A vibrant Dubai or Istanbul-like ‘hub’ potential? A robust ‘customer loyalty’ roster? Country image?

These are some of the factors that will weigh in on its privatization prospects, not just the government having to take a ‘haircut’ of close to Rs 450 billion of accumulated losses. That’s why IMF wants a proper audit; not only of the financials but, more significantly, of PIA’s true market value.

The previous government was in earnest about privatizing PIA. It couldn’t swing it. Was it only because it didn’t have the political will, or was the issue too loaded – as it will be for the present government?

Contrast PIA,DISCOS, Steel Mills, or Utility Stores Corporation to other SOEs – PPL, OGDCL, SBP, for instance – who do a reasonable job despite being in the same political stratosphere. Is the nature of business that you are in the determining factor, rather than governmental control?

The Privatization dilemma centres around a key question: why would anyone be interested in taking over a maggot-infested state enterprise when there are no restrictions on entry to the same business?

The only motivation for a buyer, or a strategic partner, is if he can get a ‘good deal’ – if the ‘intangibles’ (like real estate or routes or special infrastructure) are under-priced. But here is the rub – it opens the doors to judicial process. Possibility of a ‘throw away price’ petition has a chilling effect on investor interest.

That at least partly explains successive governments’ inability to off-load the ‘hemorrhaging’ enterprises. The logical answer is to reappraise the price of intangibles and incorporate it in the books. That’s easier said than done; also, what would it do to investor appetite?

Government faces a ‘damned if you do damned if you don’t’ situation. Let it follow the IMF script – and hope for the best.


Copyright Business Recorder, 2019

Shabir Ahmed, "State-Owned Enterprises: Hard to swallow, harder to spout," Business Recorder. 2019-08-08.
Keywords: Economics , Taxation powers , Public interest , Investor interest , Governmental control , Privatization , SOE , OGDCL