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Cost of SOEs

EDITORIAL: The Cabinet Committee on State-Owned Enterprises (SOEs) chaired by Dr Hafeez Sheikh, Adviser to the Prime...

Jun 30 2020

EDITORIAL: The Cabinet Committee on State-Owned Enterprises (SOEs) chaired by Dr Hafeez Sheikh, Adviser to the Prime Minister on Finance, was informed that the government supported the SOEs to the tune of 692 billion rupees in 2017-18 with the breakup as follows: 143 billion rupees was provided as subsidies, 204 billion rupees as cash development loans, 27 billion rupees as equity injection and guarantees amounting to 318 billion rupees; and notwithstanding this injection, the loss of the SOEs amounted to 265 billion rupees. The obvious question is why was not data for the last 22 months, during which the PTI has been in power, shared with the committee members? The answer, at best, is that the delay in checking the haemorrhage of the SOEs was to enable the Dr Ishrat Husain-led task force on austerity and government restructuring to complete the study with appropriate recommendations and, at worst, to enable the economic team to pass on the buck squarely onto the previous administration, which maybe a tad difficult to swallow after nearly two years in power.

Multifarious reasons were cited for poor performance of the SOEs including excessive political interference by the parent ministry (85 percent of all commercial SOEs are working under line ministries), lack of technical expertise and specialized skills in the line ministries for management of commercial SOEs, and overregulation by multiple agencies. This prompted Dr Sheikh to set up a sub-committee under Hammad Azhar to review and implement recommendations of the Dr Ishrat Husain-led task force.

The Sarmaya Pakistan Fund widely regarded as a critical component of Pakistan Tehrik-i-Insaaf's (PTI's) manifesto pledge on dealing with loss-making SOEs, set up by Asad Umar during his Finance Ministership, came under discussion; however, the structural benchmarks agreed with the International Monetary Fund (IMF) on all matters pertaining to the SOEs were also highlighted. Just precisely what these benchmarks are would be revealed in the second staff review report which has not yet been uploaded on the website.

However, in the IMF programme, whose effectivity began on 1 July 2019, the Pakistani team leaders committed to the passage of an SOE law, with technical assistance from the IMF, and noted that "as part of our broad SOE reform agenda we have established a holding company to manage SOEs. The objective is to increase their independence and improve their performance. We are consulting the IMF staff to ensure that adequate governance and proper safeguards are in place." In the first mandatory review dated December 2019, the Pakistani team stated that "we are committed to improving SOEs governance, transparency and efficiency. To this end we have...(ii) hired international auditors to conduct new audits of PIA and Pakistan Steel Mills...; and (iii) engaged IMF technical assistance to support our ongoing efforts to develop a new SOE law (end-September 2020). We also plan to request technical assistance from international partners to start the work on classifying SOEs into companies for sale, liquidation or retaining under state ownership." There was no mention of the Sarmaya Pakistan Fund and the committee noted that all existing directors on the board of the fund had resigned due to no progress. Be that as it may, economists/bankers argue that the fund was a non-starter as losses of SOEs are too massive.

The committee proposed 18 companies to be considered for liquidation, 35 for merger with each other, 17 to be reorganised into training institutes and 237 to be converted into government departments or corporations. Periodic studies spanning decades with recommendations on how to deal with the loss-making SOEs have been made public; however, the inherent legal and political implications of any proposal to change the status quo of an entity has negated many an attempt by several administrations to reduce SOE losses. And, with Covid-19 ravaging global as well as the country's economy, any attempt to change the status quo of SOEs is unlikely to be successful, prompting the IMF to project privatisation to succeed from 2021-22 onwards.

Copyright Business Recorder, 2020