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Sovereign wealth fund: a cure-all for SOE woes?

Updated November 05, 2018


The value of some sovereign wealth funds exceeds even the sponsoring country’s GDP.— File
The value of some sovereign wealth funds exceeds even the sponsoring country’s GDP.— File

Once again, we are knocking on the door of the International Monetary Fund (IMF) for another bailout. Once again, we are required to inject Rs400 billion into the power sector as we did back in 2013.

Why are we stuck in this vicious cycle despite consistent economic expansion over the last many years? Why do we get sucked into the so-called debt trap time and again? Why does every government have to take loans to keep the economy going? As per the IMF’s latest mission report, we need to generate more revenues and focus on overdue structural reforms, particularly those concerning state-owned enterprises (SOEs), to not only stabilise the economy but also foster sustained and inclusive growth.

Cumulative losses of SOEs, including PIA, Pakistan Steel Mills, PTV and Railways, over the last five years have surpassed Rs1 trillion. With its overall losses of Rs400bn, PIA alone is costing the exchequer Rs2bn a month.

SOEs suffer mainly because of two reasons. First, unlike private enterprises concerned solely with financial profitability, SOEs are supposed to participate in other socio-economic activities, such as job creation, provision of subsidised products and services and development of competitive priority markets. Second, instead of the chain of command, SOEs are controlled by more than one entity. Consequently, their management struggles to achieve conflicting objectives set by these multifarious stakeholders.

The value of some sovereign wealth funds exceeds even the sponsoring country’s GDP

To counteract, governments can either put SOEs up for sale or create an effective autonomous structure driven by an incentive-based performance evaluation system. While conventional privatisation has been on the cards for addressing SOEs’ woes, the PTI-led government has explicitly eliminated it as an option. In its manifesto, the party had voiced its intentions of revamping SOEs by “creating a [sovereign] wealth fund, [ensuing] aggressive de-politicisation, and through effective performance management of capable and autonomous leadership”.

Before debating how this “wealth fund” can be a cure-all for SOEs, we need to understand what it actually is. The Sovereign Wealth Fund Institute (SWFI) states: “A sovereign wealth fund is a state-owned investment fund or entity that is commonly established from balance-of-payments surpluses, official foreign currency operations, the proceeds of privatisations, governmental transfer payments, fiscal surpluses, and/or receipts resulting from resource exports.” In short, it’s a model many countries employ to make more money out of the money they have made through investing the surpluses in lucrative options (commodity and non-commodity) sans politics.

Currently, these funds are valued at over $8tr or about 9.5 per cent of the global GDP. Mostly made from petro-revenues (54pc), there are non-commodity funds as well. The value of some funds even exceeds the sponsoring country’s GDP — for example, Timor-Leste Petroleum Fund.

The level of transparency, management, investment strategies and outlook vary recognisably. In spite of all differences, one key aspect remains the same. Each of these funds has been created from governmental surpluses. With dwindling foreign exchange reserves and growing deficits, Pakistan is facing a shortfall of $12bn. With no surpluses in foreign reserves, and no petro-revenues, it will be a feat to create a sovereign wealth fund.

However, it is nothing that hasn’t been attempted before. During its vigorous SOE reforms, Vietnam created State Capital Investment Corporation (SCIC), a similar sovereign wealth fund with primary objectives“to represent the state capital interests in enterprises and invest in key sectors and essential industries with a view to strengthening the dominant role of the state sector while respecting market rules.” SCIC was created to disentangle regulatory and ownership functions of state, and to make SOEs responsible for their own actions — the two problems mentioned before.

Albeit similar in their objectives, the two types of funds differ significantly. SOEs that Vietnam equitised for SCIC were not debt-ridden and loss-making. According to the Mekong Private Sector Development Facility (IFC-MPDF) survey, Vietnamese SOEs were tasked to make“no loss, only a little profit”. But for Pakistani SOEs running cumulative losses of Rs1tr, making no loss doesn’t seem to be on the agenda.

Equitising these loss-ridden SOEs and putting them under private management give the government the best of both worlds. It will offload the losses from the state’s balance sheet and enable the management to independently divest loss-making stakes, downsize and integrate — all without any blame on the welfare state of Pakistan.

Yavar Moini, financial-sector expert at the World Bank Group, put it best: “[this fund] would represent a paradigm shift away from the state acting as an (often inefficient) operator of enterprises to an investor deploying its resources more efficiently, seeking better governance and expecting commercial returns”. Nonetheless, this paradigm shift can only be realised if the fund thus created capitalises on state patronage and asset availability with creativity and efficacy that is typical of the private sector. If successful, this will signal Pakistan’s economic maturity to the world and will fulfil the PTI’s promise of change.

Fortune favours the bold, but aspirations must not betray reality. Vietnamese may have gotten it right with their fund, but there are a few funds that lack transparency and independence — for example, Malaysian Khazanah. Charged with corruption allegations and misappropriation of funds, its management failed to operate independent of politics. Marred with institutional corruption, crony capitalism and political influence, Pakistan can relate to this a bit too well.

Cognisant of Pakistan’s socio-economic situation, the creation of an independent sovereign wealth fund will pose a plethora of problems. Shunning political meddling, nepotism and crony capitalism for efficient management, explicit regulations, performance-based incentives, professionalism, transparency and innovative business approach is needed.

The writer is an independent researcher

Published in Dawn, The Business and Finance Weekly, November 5th, 2018