SOEs: most viable option

One of the IMF key benchmarks for the current Extended Fund Facility programme is the settlement of the fate of state-owned enterprises (SOEs). This in fact is a sore point with the IMF as a carry-forward from the previous IMF programme under PML-N government, which had committed to restructuring and privatising SOEs. None of the two could be managed by PML-N in its last tenure. The incumbent government attempted to place the SOEs under a newly established Sarmaya-e-Pakistan Company and restructure them as commercially viable companies. This scheme apparently did not work. The government is reported to have now decided to make fresh laws to turn all state-owned enterprises (SOEs) into profit-making entities.

Under the programme, the finance ministry would obtain information from Auditor General of Pakistan (AGP) about the availability of expert auditors to carry out forensic audit of major loss-making SOEs in pursuance of PM's directives. Whereas, a draft SOE law, namely the State- Owned Enterprises (Governance and Operations) Act, 2020, has been prepared that covers: a) Prudent and efficient management according to which commercial SOEs must be commercially successful and non-commercial SOEs must be efficient; (b) Measurable performance according to which every state-owned enterprise must identify its business goals; (c) Responsible management according to which the management of a state-owned enterprise must be competent, honest and accountable; (d) Transparent performance must be ensured. Under the proposed law, a state-owned enterprise would have to report its performance fully, transparently and timely. The draft law would also provide selection criteria for a director, encompassing corporate governance mechanism frame-work. It has also been reported that Dr Ishrat Hussain, Adviser to the PM on Institutional Reforms and Austerity, has put up his observations on this subject.

The result is a plethora of reports by different committees accumulated over decades on government files with nothing meaningful or worthwhile noticeable on the ground. It is obvious that these exercises are superfluous and unlikely to address the core issues facing the SOEs. There have been ad hoc and aimless approaches by past governments to address the SOEs' problems but they were short-lived and reversed with change of government. There is no shortage of laws in our legal system and frame-work. It is the meaningful application and implementation of laws that is lacking.

The issues of SOEs are crystal clear but the solution is complicated which requires above all a strong will, statesmanship, determination and the mettle to take bold decisions. So far no government has exhibited the courage to effectively deal with it.

As matters stand today, most of the soes are by and large terminally sick as a result of poor governance, incompetence, nepotism, corruption, politically aligned workforce, deep-seated vested interests and bureaucratic control. The government of the day has to decide which way it wants to go from here. The following are three key options for the government:

1) Continue with its attempts to salvage the SOEs in a hope to turn them around;

2) Outright privatise the SOEs; and

3) Public Private partnership.

Option 1 does not appear to be working out. In the last two years, a great amount of good money has been pumped into PIA and Pakistan Steel Mills to salvage these two prime SOEs. Success is nowhere in sight. The fragile financials of the country may not permit the luxury of such subventions to continue on.

The outright privatisation of SOEs (Option 2) could be the most viable option and should have been accomplished under the last IMF programme, by the previous government. The time for the incumbent government to accomplish Option 2 in the remaining three years of its five-year tenure is not possible mainly because of the fact that nothing noticeable appears to have been achieved by the Privatisation Commission so far.

The viable option under the prevailing circumstances appears to be Option 3, under which the private sector could be offered a fair portion of equity/stakes and the entire unhindered management control for the restructuring and operations of SOEs as truly business entities isolated from bureaucracy-driven controls and interference by vested interests. It's about time the government chose the last option and worked on its implementation in the remaining three years of its five-year tenure.

(The writer is former president Overseas Investors Chambers of Commerce and Industry)

Copyright Business Recorder, 2020