SOEs: sell-off or liquidation

The federal cabinet has approved the State-Owned Enterprises (SOEs) Bill 2021 proposing governance reforms in the management and oversight of cash bleeding public sector. A detailed report titled “State-Owned Enterprises Triage: Reforms & Way Forward” states that the government has categorized SOEs into a different list of companies that will be kept part of the public sector while 44 companies will be privatised or liquidated in phases. Whereas 14 entities are planned to be retained under government ownership but require immediate reforms and possible restructuring. Among them are Pakistan Railways and Pakistan International Airlines that collectively made a loss of Rs 88 billion in FY19.

Through an act of parliament a law will be introduced for structural governance reforms in the management and oversight of the SOEs. Through this enactment, the boards of directors of the SOEs will be given more autonomy in terms of decision-making in addition to ensuring the separation of the office of chairman from the CEOs in all SOEs, including the entities established through special enactments. The SOEs shall be moved out from the line ministries/divisions and placed directly under the federal government, which shall form a Central Monitoring Unit (CMU), manned by experts hired from the market that will function as the central database and analytical unit for all the SOEs.

Though late by over two years, this is a welcome decision in the public and national interest. Had this logical and inevitable decision been taken in the first 100 days of the incumbent government, it could have been, by now, richer by few trillion rupees through some of the privatisation proceeds and savings of trillions doled out to sustain the sick SOEs. The political leadership instead opted to establish an entity called ‘Sarmaya Company’, placing all the SOEs under it to be restructured and turned around as viable business entities. This, as expected, did not fly as there was no aggressive mechanism that was put in place to move SOEs out of ministry and minister’s hold. Both were unwilling to surrender their dominance on public assets.

The slide of SOEs started in the early 1990s. The prime reason for this woeful state of affairs is a seriously flawed governance structure. The state business enterprises were placed under the umbrella of line ministries - manned by bureaucrats and political leadership with ministers at the top. This model of state enterprise governance has failed to deliver across the world, including in the then Soviet Union, the UK and India. Each understood long ago that, business is the domain of an entrepreneur who has strong appreciation of ‘profit and loss sensitivity’. Bureaucrats and politicians do not possess this feel and are not competent enough to supervise business enterprises. Any meaningful reform in SOEs, in all these years, was frustrated by bureaucrats and political leaders. This time too, the bureaucrat-politician combine is the biggest challenge to the proposed bill. But the bill is likely to sail through as the International Monetary Fund (IMF) has now firmly put its foot down and its further disbursement of loan tranches is conditional to privatisation and liquidation of loss-making SOEs. There is now no two ways about it.

The proposed bill intends to move SOEs out of the line ministries and place them under a Central Monitoring Unit (CMU) - to be established by the federal government. On the other hand, the bill proposes to entrust operational and financial autonomy to the Board of the Enterprises to manage their affairs. Unless the role of CMU is strictly limited to data collection and its consolidation, the function of CMU/federal government is superfluous, confusing and conflicting. It could be exploited for interference by the federal government and would mean reintroducing the bureaucracy in another manner. This is not desirable.

The corporate sector is regulated by state regulators such Securities and Exchange Commission of Pakistan (SECP), and other government entities to ensure that business concerns comply with rules of business and fair business practices. The published audited report and balance sheet of a corporate entity is the true reflection of its operational and financial performance.

To achieve the desirable results, SOEs should also be structured, made functional and perceived as corporate sector enterprises. They need to be entirely insulated from any of the government and political intervention, in any shape whatsoever. The big question is how far and how much the incumbent government will be able to achieve this goal in its remaining tenure of a little over two years – with the fifth year as the year of election.

(The writer is former President of Overseas Investors Chamber of Commerce and Industry)

Copyright Business Recorder, 2021