Holding company to fix bleeding SOEs

Updated January 21, 2019

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THE government is contemplating the launch of a new state-owned holding company — Sarmaya Pakistan — soon. It will hold and manage nearly 200 state-owned enterprises (SOEs) and undertake strategic decisions to turn them around and make them operational.

The idea behind the establishment of the holding company is to free the SOEs (like PIA, Pakistan Steel Mills, etc) of political influence and place them under the control of successful business executives.

The creation of the SOE holding company is part of the election programme of the ruling PTI. According to its plan eight of the company’s 11 board members, including its chairman, will be picked from the private sector. The remaining three will represent the government on the board. However, the government is yet to make public the legal framework under which the company will operate.

Finance Minister Asad Umar believes it to be a responsibility of the state to turn around loss-making state-owned businesses. But the former Engro Corporation boss recently told a gathering of businesspersons at Karachi that the job couldn’t be entrusted to politicians or bureaucrats because they were not trained (for this). Only people with ‘credentials to manage business enterprises’ could do it, he had added.

The minister has repeatedly blamed governance issues, political interference and energy price distortions for the losses accumulated by the SOEs over time, insisting that the creation of an independent holding company with credible professionals running it could stop financial bleeding.

The concept of forming a holding company has successfully been adapted in Malaysia and Singapore. Can this model succeed in Pakistan?

The concept of forming a holding company to manage a country’s commercial assets is not new. It has successfully been adapted in countries like Malaysia, Singapore and elsewhere in the world. But can this model succeed in Pakistan?

Asif Qureshi, the executive chairman of Optimus Capital Management, believes it cannot. “The overall economic environment required to support the operation of this kind of model is currently missing in Pakistan. Given the enormity of the current macroeconomic predicament the government does not have the luxury of time for such an experiment.”

Marred by decades of mismanagement, corruption and political and bureaucratic interference, the SOEs are a major drag on the cash-starved government’s finances.

Their accumulated domestic debt and liabilities have almost doubled from Rs665 billion (or 2per cent of GDP) in 2015 to Rs1,299bn (or 4pc of GDP) in 2018, according to the annual report of the State Bank of Pakistan on the state of the country’s economy in 2018.

The size of the gross debt and liabilities rose by slightly above Rs60bn during the first quarter of the present financial year to September. Furthermore, the external debt of these SOEs has risen from Rs253bn at the end of financial year 2015 to Rs353.6bn in the first quarter of the present fiscal.

In a recent note on Pakistan’s economy, Fitch Solutions said the poor performance of the SOEs, which posted a combined net annual loss of Rs44.8bn in 2016, will likely continue to be further drag on public finances.

“The PTI (government) has stated a desire to depoliticise the leadership of the behemoths in this area. However, rather than undertaking a cleaner break and moving these organisations into private ownership, the government is planning to move them under the umbrella of a sovereign wealth fund along the lines of Malaysia’s Khazanah Nasional, which does not remove them from contingent liabilities,” said the note.

Dr Ishrat Hussain, who is currently advisor to the prime minister on institutional reforms, is hopeful that the concept will deliver the desired results as it has in Malaysia and Singapore.

“The government will part with its commercial assets, freeing them from political and bureaucratic influence and transferring them to the independent Sarmaya Company. The Sarmaya board comprising experienced professionals will make recommendations as to which business or enterprise is to be sold, liquidated or restructured,” he said.

Mr Qureshi insisted that the government should sell the state-run businesses to private investors to avoid accumulation of more debt on their behalf. “The government should pursue an aggressive privatisation programme beginning with relatively easier assets like Lesco, Fesco and Iesco.

“One way of doing this could be through ‘fresh capital issuance’ to the prospective private buyers. That way the management will be transferred to private investors and the privatisation proceeds will also remain with the company for undertaking capital investments. Moreover, the government will not have to divest with its shareholding in the company,” he concluded.

Dr Waqar Masood Khan, a former finance secretary, considers the formation of the Sarmaya Company a waste of time and financial resources, warning of legal hitches in the implementation of a plan that involves transfer of assets to the holding company.

He also cautioned about strong resistance from line ministries which will be left with nothing to work on once they agree to divest the companies they control. “Such models work in surplus economies ... We are a perpetually deficit country. How can we afford this experiment?

“Privatisation can prove to be a quicker means of attracting foreign private investment and shore up foreign exchange reserves. But if the government doesn’t want to sell these businesses, it should at least consider giving their management control to the private sector or to a consortium of provincial and local governments and the private sector.”

Published in Dawn, The Business and Finance Weekly, January 21st, 2019