State Owned Enterprises- What to do with them? Ali Hashim, July 25, 2013 When I hear that the new Government is developing a policy for Management and Restructuring of State Owned Enterprises (SOEs) once again, I am reminded of Einstein’s definition of insanity- “the act of doing something over and over again and expecting a different result”. The common perception is that if the Government appoints an honest management team and stops interfering in the day to management of SOEs then this will turn things around and the SOEs will become financially viable concerns providing useful goods and services to society. The problem with this proposition is that these two conditions are well-nigh impossible to meet in Pakistan. The previous fifty years have shown that many efforts to do precisely this have not been successful. Positions of the Chief Executive and those on the Boards of Directors of these enterprises have been used by all governments, both military and political, as plum appointments to reward friends and supporters, and to induct others on the SOE payroll, subverting the normal recruitment process. I started my management career at Pakistan Steel and am a firsthand witness to this phenomenon. The whole idea of State owned enterprises was a product of the thinking in the post-World War II era with the State acting as the key economic agent. SOEs were set up as instruments for the development of manufacturing, the fostering of infant industries and export diversification. It was also widely believed that economic dependency on foreign sources could be eliminated through the establishment of SOEs that would have the size and resources necessary to compete successfully with large multi-national corporations; SOEs were seen as a counterweight to foreign ownership. (ESCAP paper) SOEs were set up specifically outside of core government so that they could (a) operate outside the regime of the strict financial regulations that govern the expenditure and receipt processes of core government agencies via the Treasury; and (b) have more flexibility in the hiring and firing of their employees at enhanced wages and perks that were more comparable to the terms offered to private sector employees. This thinking has proved to be flawed, with inefficiency and corruption running rampant in the public sector. The World Bank, in a study estimates that “the fiscal drain of public enterprises, together with the losses of the financial system, can reach 8 to 12 per cent of GDP, two to three times the spending on health care and education”. The problem is that the only true criterion of success of a commercial enterprise - the bottom line – is never applied strictly. Under one excuse or another, the Government bails these enterprises out once they have run through the previous tranche of investment and have again run up huge losses. In the private sector they would be closed down the first time around. Thus, SOEs enjoy many of the advantages of the private sector corporations but are not accountable in the same way for their bottom line. The overall problem of management of SOEs is systemic and cannot be solved in the public sector - in Pakistan at least. In Pakistan, I have not seen any of the many public sector corporations performing efficiently on a sustained basis. Stories in the press that one or the other of these SOEs have achieved record profits at a given point in time are either inaccurate, with only the marginal operating cost used to calculate profitability, or down right lies planted by a new management team appointed after a restructuring! The goods and services produced by most of these enterprises are not restricted commodities and can be obtained easily from the open market. In fact, often the price of these goods and services as available from the market is less that that produced locally from these SOEs. The current thinking is that Government needs to be as small as possible and its role should be restricted to making and managing the policy architecture and management of areas like Defense, Foreign Affairs, Law and Order, Monetary policy and some others, that are best managed by government. All activities that are not the core business of Government should be removed from the public sector and be provided by the private sector under regulations and oversight provided by government. Dr. Farrukh Saleem has reported recently that Pakistan’s SOEs together run up a huge annual operational deficit of Rs. 500 billion with an additional Rs. 500 billion of annual financial losses. These numbers are consistent with the World Bank study findings mentioned above. This is a serious hemorrhage on our fiscal resources and if we get rid of a major part of this overhang, it could make a serious dent in the fiscal deficit. The argument that these SOEs provide seriously needed employment opportunities does not stand scrutiny. They do provide employment but at what cost? A simple calculation shows that the annual payroll of all the SOEs in Pakistan put together is one half to one third of the annual subsidy that these enterprises require annually. It would seem to be less costly to just pay these individuals to stay at home and purchase the goods and services they produce from the market! ( I am told that after privatization of the KESC, as part of the deal with the Collective Bargaining Agent, a significant number of the employees are just being paid a salary to stay at home!) Dr. Farrukh Saleem argues that the State enterprises should be restructured and their management structures revamped according the OECD guidelines. However, my point is that it will be well nigh impossible to implement the OECD guidelines in our political environment and it would be best to make a clean break instead of making changes at the margin. I think it would appear that the correct course for the government to adopt is that the majority of the State enterprises be privatized as soon as possible. As Mr. M. Yakub the former Governor of the State Bank, has said recently in a column in the News, that the SOE sell off should be done even if it appears that we are not getting a fair return for them. We find a lesson for us to follow in the case of Pakistan Steel. The last attempt to privatize the Steel mill under Gen. Musharraf was stopped by the Judiciary. This was a well-intentioned, though ill-advised move. It is possible that the price being offered was below the true market value, but the investment made in the mill to cover the losses since then has more than met the difference. Please note that the Government has already decided to contract out the management pf the Gwadar Port to the Chinese. Let me tell you of Laos who are currently building a massive railway system with the help of the Chinese which will be operated by them. Perhaps PIA could also do better with external management. I would therefore advise the new Government to look at the option to privatize SOEs very carefully and without further delay. They are headed by a business team which has extensive experience in this area. I am sure they can design a privatization package which safeguards our interests and finds good buyers. It needs to emphasize once again, it will not be useful to make changes at the margin by setting up a new management structure for the SOEs for the reasons outlined above. As they say, when you are in a hole the first thing you need to do is to stop digging!
Posted on: Thu, 25 Jul 2013 20:29:06 +0000
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