Loss-making SOEs

Published March 8, 2021

THE government has chosen 84 out of a total of 212 state-owned enterprises for privatisation, liquidation or retention in the public sector to meet a structural benchmark of the IMF as it moves towards revival of the suspended $6bn loan programme. A bill is also being drafted to improve their governance and help the government strengthen their oversight. Under the agreement with the IMF, the PTI administration had pledged to initiate restructuring and privatisation of SOEs, and strengthen their monitoring for increasing transparency through a legal framework. But it has not done much until now. Given the continuing losses of these companies and their financial burden on the budget, it is encouraging to see the government finally coming up with a plan to deal with them after two and half years of being in power.

According to a finance ministry report, the selected enterprises, which together employed 450,000 people and generated revenues of Rs4tr in FY2019 against the book value of Rs19tr of their assets, had collectively suffered hefty net losses of Rs143bn. A year before, their combined losses stood at a whopping Rs287bn. The losses of the top 10 loss-making SOEs like PIA, Pakistan Railways, power companies and the National Highway Authority account for around 90pc of the total losses each year. While there is no doubt that some of these companies need to be liquidated and others sold to the private sector, the decision to retain certain enterprises and restructure them in the public sector should be supported conditionally. Indeed, the majority of public-sector organisations aren’t suffering massive losses from the functions they perform. Incompetence, mismanagement, political interference and lack of investment are the key reasons for the losses and debt stocks they have accumulated over the decades. This implies that some of these companies can still be turned around and made profitable if competent people are inducted. In other words, the government needs to transfer the management of the enterprises it decides to retain to those with experience of running similar companies that have been transformed into profitable entities. Perhaps a good example of profitably managing public-sector businesses is the ‘mixed ownership model’ whereby the government owns the companies but these are run and managed by independently hired professionals without intervention from bureaucrats or politicians. Unless the reform programme has room for transferring the management of firms whose ownership the government plans to retain, successfully restructuring SOEs will not be possible.

Published in Dawn, March 8th, 2021

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