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The false narrative around SOEs

Selling state companies is a bad idea. But despite failing repeatedly in practice this idea has resurfaced in the 2023-24 budget proposals, which say that next year the government

will raise Rs96 billion by selling state companies.

So, what’s going on here? Why do our economic managers wish to peddle state companies when they should be fighting our real problems, which are poverty, illiteracy, child malnutrition and unemployment? You might think it’s because selling ‘loss-making’ state companies makes them look like tough-minded people earnestly fighting budget deficits. That’s surely part of the answer. But the bigger picture, I would argue, is ideological. It’s their false belief that ‘business is not the business of the state’. Why false? Because we have several decades worth of world experience showing otherwise.

How then should we push back against these managers? It is tempting to show that they live in a fantasy world, that lurking behind their ideology is a faulty premise, which raises doubts about their competence — and their connection with reality. But the bigger problem with selling state companies is that it’s all wrong on the merits. So, for now, let’s put aside ideology. Let’s ask instead whether state companies are really a fiscal disaster? And whether, as the Privatization Commission says on its website, they burden the national budget, burden the poor people, so that selling them ‘salvages the government through reducing state subsidies?’

Now, the truth is that this much-hyped storyline that all state companies are a burden on the budget is completely false. But it has settled in the people’s minds abetted by a complicit media. That may be the reason why a loss-making state company, PIA, makes up the usual headlines, while profitable companies like Oil and Gas Development Corporation (OGDC) and Pak Petroleum (PP) are sacrificed on the Privatization Commission’s altar without anyone noticing the difference.

To illustrate this point, that there is a huge gap between what the people think about the performance of state companies — that it is poor — and the reality, I give you evidence from the latest PP and OGDC annual reports. The first thing you see is that we, the people of Pakistan, own about two-thirds of both companies. But the especially notable aspect is the outstanding performance of these companies, and their enormous profits year after year after year. So, PP’s after-tax profit last year was Rs54 billion and it put Rs45 billion in the national kitty in taxes alone. In the past six years its cumulative profit was Rs299 billion. There’s more, and it further strengthens our case: last year OGDC contributed Rs207 billion to the national kitty, and Rs821 billion in the last six years.These are colossal amounts. To put them in perspective, consider this: the Rs250 billion the two companies gave to the government last year is about 70 per cent of the cost of servicing our external debt; it exceeds BISP’s expense by Rs79 billion. And it is ample proof that the Privatization Commission used a false guise to sell 644 million shares of OGDC. As a result, just 67 per cent of it is now left in our ownership.

You might expect that in view of this the Privatization Commission will pause and relent. But no. It sticks to its guns insisting that selling state companies would do great things for our country. But foolhardiness aside, it’s important to realize that the case for selling state companies is clearly wrong on the merits.

Likewise, the ideological premise of selling state companies is flawed, which brings me to the mantra that ‘business is not the business of the state,’ aka free-market capitalism. Now, economic historians will tell you that this has never been the case. Not one of today’s Western economic powers practised free-market capitalism during its development. Take for example France. Its state created ‘national champions’ like Air France, French railways, the aeronautics contractor EADS.

The world’s 13 biggest oil companies controlling three-quarters of the world’s oil reserves are state companies. China’s 150 biggest companies are state companies. Two of the world’s four biggest banks are Chinese state companies. State companies now account for more than a fifth of the global stock market value. The fact is that ‘business is not the business of the state’ only exists in economics textbooks, in IMF reports and in the minds of our economic managers.

Even for a casual observer of the current international scene the resurgence in the west of ‘business is the business of the state’ is unmissable: the US and France are spending big sums on children, on infrastructure and to green their economies, which is the right thing to do. So, if we are seriously concerned about our economic future, let’s not be distracted by foolhardy budget proposals to sell state companies. Instead, let’s single-mindedly address our real issues of poverty, illiteracy, child malnutrition and unemployment. In terms of priorities, these should be well up in the list because the cost of delaying action on these issues in terms of wasted human potential is huge.

And remember, every country relies on the state to kickstart growth and create national economic champions. The Chinese have a phrase for this trend: the state advances while the private sector retreats. That is the world’s future.

And our future? It is a beleaguered government desperately raising cash for impatient creditors. But its search for an easy way out, its lack of patience, may be precisely what derails our development ambitions.

Selling profitable state companies is bad housekeeping, and a verbatim repeat of past bad privatizations, such as KESC and of PTCL. If you read their stories you see a cesspool of scandal; and you might expect the government to learn from this experience, admit mistakes, admit that selling state companies is a bad idea and seek new ways forward. But no. It keeps selling the best family silver. Neither evidence nor sound arguments matter. Sounds bad? It is.

Email: Khwaja.Sarmad@gmail.com

Sarmad Khawaja, "The false narrative around SOEs," The News. 2023-06-08.
Keywords: Economics , Economic future , Economic powers , Privatization , Unemployment , Pakistan , OGDC , PIA