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Outright privatisation or gradual reforms?

March 11, 2013

BLEEDING public sector enterprises are draining substantial state resources while progressively deteriorating the government’s fiscal balance.

In the last five years, the federal government borrowed Rs2.7 trillion from the IMF, and spent Rs2.3 trillion on financing losses of public sector enterprises through equity injection, subsidies, grants, debts and guarantees on loans.For example, the Pakistan Railways generated Rs14 billion in revenues last year — barely enough to meet its own fuel costs. While the entity has the potential to bring profits for the exchequer, in 2012-13, it relied on a Rs51 billion injection from the federal government to be able to meet its total administrative cost. Salaries to railway employees are directly paid by the ministry of finance.Meanwhile, combined outstanding loans of the national flagship carrier, Pakistan International Airlines (PIA), have touched a whopping Rs180 billion. After three of its planes were grounded recently, it has only 19 carriers left for its domestic and international flights. The federal government recently announced a fourth bailout package, worth Rs100 billion, for the flagship carrier.

On the other hand, the power sector has also reaped benefits over the years, in the form of subsidies. In the last five years, it received subsidies worth Rs1.3 trillion, so that it could, primarily, bridge the tariff gap determined by Nepra. Specifically, the amount included tariff differential subsidy (TDS) to power distribution companies (Dscos, Karachi Electric Supply Company and Fata). The sector also received GST exemptions on lifeline consumers, which was recently withdrawn.The total domestic debt of PSEs stood at Rs1.6 trillion over the last five years. The government’s problems were compounded, as it acts as a guarantor as well as a provider of these loans. As of now, the government’s total outstanding accumulating guarantee on loans is Rs657.9 billion. These loans are around equally split between domestic and foreign currencies.

Growing losses at PSEs seem to be becoming a challenge to manage for the country’s economic managers. Inefficiency, mismanagement and corruption are mainly held responsible for hefty losses and poor performance of these entities.

There are two possible policy options that could help the country deal with the challenge of getting these enterprises back into the black. The first involves undertaking institutional reforms by improving governance, while the second involves carrying out institutional restructuring through privatisation.

However, outright privatisation, particularly of loss-making entities, is neither viable and nor does it seem politically acceptable. The government believes that a universal, ‘one size fits all’ solution is not viable for PSEs. In 2010, the Cabinet Committee on Restructuring established a roadmap to reform eight PSEs. But the committee was evidently unsuccessful in bringing about any substantial results. In 2011-12, the government budgeted Rs70 billion for this, out of which not a single rupee was utilised.

While there is evidence to support that there is a political consensus on reforming the bleeding public enterprises, divisions come to light over solutions.

Thus, to improve the performance of, and curtail losses at, diversified PSEs, institutional reforms seem to be a viable solution. We can thereafter move onto privatisation. In this context, after more than two years of joint efforts by the Securities and Exchange Commission of Pakistan (SEP), the Economic Re-Structuring Unit of the ministry of finance, the Pakistan Institute of Corporate Governance, and the Centre for International Private Enterprise, the finance ministry notified the Corporate Governance Rules for Public Sector Enterprises last week.  These rules are principally based on the Code of Corporate Governance issued by the SECP and recommendations contained in the Guidelines on Corporate Governance of SOE’s, which were issued by the Organisation for Economic Cooperation and Development (OECD).

These rules essentially aim at improving transparency at these entities, by appointing competent board members and CEOs, strengthening internal control mechanisms, augmenting disclosure and transparency requirements, and undertaking periodic performance evaluation of board members.

To ensure the success of these reforms, an enabling environment is desirable, which, in turn, would need changes in legislation, as well as cost analysis and private sector partnership. It would be in the larger national interest if the government not only ensured timely implementation, but undertakes additional legislation that would make these rules binding on PSE’s that are governed under their own special acts, and might find excuses to not comply.

The writer is Country Director of Center for International Private Enterprise, an affiliate of US Chamber of Commerce