The chaotic pursuit of privatisation of state-owned enterprises
Last week, Finance Minister Muhammad Aurangzeb reported “very good progress” on privatising loss-making Pakistan International Airlines (PIA) and outsourcing three airports.
Meanwhile, the Privatisation Commission of Pakistan is reportedly busy devising a new three-phase strategy to privatise state-owned entities (SOEs), barring those considered of national or strategic importance.
The current privatisation list focuses on loss-making public enterprises and prioritises entities like PIA and power distribution companies to reduce the government’s involvement and haemorrhage of taxpayers’ money.
The massive annual losses of Rs500 billion incurred by the SOEs, which form a part of growing public expenditure, have become a major drag on the national budget, with their accumulated losses topping Rs2.5 trillion or nearly $9bn. Moreover, the financial burden of these resource-guzzlers, apart from haemorrhaging government budgets, has also become a source of systemic risk for the financial sector.
‘Haste can do more damage than good, with the risk of oscillating towards creating a private sector monopoly in lieu of a public sector’
The World Bank has pointed out in a report that the profitability of SOEs in Pakistan had been declining and turning into losses for about a decade. Things have come to a stage now where “the profitability of Pakistan’s federal SOEs is the lowest in the South Asian Region” as their aggregate profit at 0.8 per cent of GDP in 2014 turned into losses worth 0.4pc of GDP in 2020 and, growing, thus becoming a major driver of fiscal deficit and source of substantial fiscal risk.
But successive governments, despite being cash-strapped, have gladly bankrolled these SOEs with borrowed money. However, many believe that with little easy money available to continue financing their losses through borrowings, the government has no option but to eliminate them.
The current privatisation initiative, undertaken under the army-backed Special Investment Facilitation Council (SIFC), aims to sell shares of certain public assets to investors from friendly Gulf countries.
The authorities expect a massive investment of more than $50bn from the United Arab Emirates (UAE) and Saudi Arabia alone over the next five years. So far, however, only a fraction of the investment has been made by investors from these two countries in Karachi Port and a private oil marketing company.
Privatisation of loss-making public entities and improvements in the governance of others are also major goals of the ongoing International Monetary Fund (IMF) rescue loan as part of structural reforms. They will also be major conditions of the next medium-term bailout Pakistan is seeking from the lender of last resort. According to reports, the IMF wants early privatisation of PIA, Pakistan Steel Mills, RLNG power plants, and electricity distribution companies.
According to Muslim Commercial Bank Limited chairman Mian Mohammad Mansha and former State Bank of Pakistan Governor Shahid Kardar, successive regimes have overstretched the mandate of the Pakistani state, burning huge holes in its budget.
“This has resulted in its inability to perform, efficiently and effectively, what should be its core functions — security of life and property of its citizenry, and provide justice and some basic social services, responsibilities that it must pay for and provide.
“This private behaviour is rational since these choices are being made based on service quality. But they resist privatisation because there would be reduced opportunities for ‘patronage’ [an appropriate all-embracing term in our context] or earnings as fees or junket trips as directors of these publicly owned entities,” they have argued in a joint op-ed for this paper.
Pakistan started privatisation of the state-owned enterprises in the late 1980s under the IMF’s Structural Adjustment Programme (SAP) when the first Benazir Bhutto government offloaded 15pc shares of PIA through the stock exchange. The privatisation transactions have returned a gross value of Rs650bn (approximately $2.36bn) to the government during the last three decades.
In addition, it has saved recurring losses of billions of rupees per annum and brought in efficiency and profitability in several privatised SOEs, if not all of them.
The privatisation of banks, the telecom industry, and electronic media is often underlined as huge success stories that must encourage policymakers to disinvest the remaining SOEs to save taxpayers’ money, improve efficiency, create more market competition, and encourage greater private sector investment and participation in the economy.
However, people like former investment minister Haroon Sharif think the government must decide as to why it wants to privatise SOEs. “Before heading into privatisation, the government and SIFC should clearly state and communicate the reasons for their decision to choose this path.
“Do they want to get rid of loss-making entities because they can’t manage them? Or have they determined, in principle, that it is not the government’s job to run these businesses? There is a difference between the two,” Mr Sharif told Dawn.
“They must spell out a clear-cut policy. Otherwise, these transactions would not only not fetch the desired revenues but also risk ending up in litigation [as has happened in the past in many cases],” he concluded.
He is of the view that privatisation is only one tool to transfer management to private investors — it has produced mixed results in different countries. “There are other solutions as well to invite private participation in the management of SOEs without the typical sale of shares, whether it be concessions, franchise or management contract.
“The authorities must consult widely and involve professionals to make the process a success. The ultimate goal should be to stop the bleeding of public money.”
The World Bank has also raised concerns over Pakistan’s approach to privatising its SOEs. The bank has identified economic volatility, judicial activism and resistance from trade unions, litigation, fears of monopoly creations, weak political commitment, and perceptions of corruption cost post-2007 as key factors leading to unsuccessful privatisation efforts.
In its Public Expenditure Review 2023, the lender cautioned the government of looming litigation in divestments to foreign states under government-to-government contracts and instead advised public offerings through stock exchanges followed by privatisation under the transparent oversight of a special joint committee of the parliament.
“Such a move (under government-to-government contracts) could lead to litigation, raise questions about transparency and full disclosure and may slow down the privatisation process further.
“Judicial decisions in the Pakistan Steel Mills privatisation and Reko Diq mining contract cases badly hurt Pakistan’s image as an untrustworthy country where international contracts are not honoured, and businesses always run the risk of falling victim,” the Bank said.
It has also advised revamping the privatisation commission by staffing it “with able professionals who can prepare a financial model for each entity to be privatised” and ensuring that privatisation promotes efficiency and competition in the economy.
Zafar Masud, the president/CEO of the Bank of Punjab, believes that sustainable growth is impossible without a thriving private sector, for which the starting point is a Private-Public Partnership (PPP). He also cautions that privatisation — awarding concessions or ownership transfer— must be undertaken with extreme care.
“While it’s an absolute must, its pursuit in haste can do more damage than good, with the risk of oscillating towards creating a private sector monopoly in lieu of a public sector. Therefore, we need to do at least two things before we embark on privatisation. Firstly, regulators should be made independent and stronger, with the appointment of top professionals on merit and on market terms to protect people.
“Secondly, transaction structure and selection criteria of successful private parties shall be such that it would promote competition and have a broader view of long-term economic prosperity rather than myopic bottom-line approach. Investors with a private equity mindset, backgrounds, for example, shall be discouraged and prohibited,” he told this correspondent.
However, the authorities have decided to move ahead with their privatisation plans, and it is amply clear that progress will remain chaotic at best without extensive reforms and greater transparency.
Published in Dawn, The Business and Finance Weekly, April 1st, 2024