SOE conundrum: To be, or not to be…

State-Owned Enterprises (SOEs) have become a subject of heated debate in Pakistan, with conflicting opinions on their impact. Detractors argue that SOEs drain national resources through inefficiencies and misappropriation, while proponents highlight their significant role in socioeconomic development.

This article aims to present a comprehensive analysis, using examples like OGDCL (Oil and Gas Development Company Limited) in Pakistan and EDF in France, to demonstrate that SOEs can achieve financial sustainability when granted autonomy and operate in a competitive environment with minimal government interference. Emphasizing the importance of competent Boards of Directors, this article advocates independent decision-making and fair competition to maximize SOEs’ potential.

Fostering socioeconomic development:

SOEs often operate in vital sectors critical to a nation’s growth, such as energy, transportation, and infrastructure. Through their government ownership, SOEs can align their objectives with national development goals and ensure the provision of essential services to all citizens. Their contributions extend beyond financial gains, facilitating economic stability, job creation, and improved public welfare.

Dispelling misconceptions

While concerns regarding mismanagement and misuse of resources exist in both public and private entities, effective governance and accountability mechanisms can address these challenges. Discrediting SOEs as perpetual “white elephants” oversimplifies their potential and overlooks the positive impact they can make when properly managed. To achieve financial sustainability, it is crucial to address issues of governance and promote transparency within the SOE sector.

Autonomy as a Catalyst for Success

Allowing SOEs to operate with autonomy is crucial for their financial viability. Minimizing government interference enables efficient decision-making based on market dynamics, fostering innovation, adaptability, and responsiveness to consumer demands. By emulating private sector practices, SOEs can improve efficiency and achieve profitability.

Case Study: OGDCL in Pakistan

The Oil and Gas Development Company Limited (OGDCL) in Pakistan exemplifies the potential of an autonomous SOE. Despite being government-owned, OGDCL has achieved profitability through competent management, strategic decision-making, and efficient resource exploration. By harnessing Pakistan’s energy resources, OGDCL contributes significantly to energy security and revenue generation, highlighting the financial viability of SOEs when properly managed.

However, since last many years the largest national oil and gas exploration and development company is badly affected by non-payments by its various clients affecting OGDCL’s balance sheet and severely undermining its expansion plans. Moreover, the company cannot operate freely and is required to supply gas to non-paying state distribution utilities due to binding regulatory framework.

OGDCL is to receive about Rs 1 trillion from different clients on account of crude oil and gas supply. Of the total, its receivables from Sui Southern Gas Company Limited (SSGCL) stand at Rs282.4 billion and from Sui Northern Gas Pipelines Limited (SNGPL) Rs239.2 billion.

It is worth noting that OGDCL produces gas at different fields and provides it to SSGCL and SNGPL. In turn, the two gas utilities supply gas to consumers in different categories which comprise domestic users, commercial units and power plants. These state distribution companies are required to sell gas under a priority formula set up and approved by the federal government subsidizing some consumers at the cost of the others also creating challenges for the companies to operate in a profitable manner.

Furthermore, some power plants receive gas directly from OGDCL’s fields for electricity production. Among the power plants, Uch Power Limited has to pay OGDCL Rs71.8 billion, Uch-II Rs54.17 billion, Engro Rs263 million and Fauji Kabirwala Power Company Limited Rs23 million.

OGDCL also produces crude oil and supplies it to local refineries for processing and production of petroleum products. These refineries have to pay a total amount of Rs61.8 billion for crude oil consumption. The non-payment by these companies is a separate matter of inquiry but for the present purpose it is noted that the OGDCL is the worst affected among the chain of companies in the public sector getting a financial hit on account of factors generally attributed to the government’s socioeconomic agenda rather than any intrinsic flaw in the operations of OGDCL or other SOEs notwithstanding the line losses and the high amount of theft and unaccounted for gas perpetuating the ever ballooning oil and gas circular debt

Global Example: Electricité de France (EDF)

EDF, a government-owned enterprise producing and distributing electricity in France, demonstrates that financial sustainability is attainable even in highly competitive markets. EDF’s success can be attributed to its ability to adapt to changing market conditions, invest in renewable energy sources, and leverage its expertise to remain competitive globally.

These achievements underscore the potential of SOEs to thrive when allowed operational autonomy. In the year 2022, the EDF operations in the UK earned it a hefty profit of €1.26bn supplying electricity and gas to five million households. While in the same year the company overall faced a loss of €4.99bn due to government’s policy decisions.

In France, President Emmanuel Macron’s government responded to Russia’s invasion of Ukraine by imposing a tariff “shield” for consumers, limiting energy companies to a 4% rise in 2022 followed by 15% in 2023, keeping inflation lower than in other European countries. But it meant that EDF had to sell power to French consumers at a loss, while UK consumers paid far more for their energy. EDF has around 80% of France’s electricity market. Isn’t it ironic that a state-owned company is making loss in its own backyard while earing big profits in a country next door?

The role of competent boards of directors

To ensure SOEs’ financial sustainability, it is imperative to appoint competent and experienced boards of directors. These boards should consist of professionals with industry expertise and a deep understanding of corporate governance principles. By empowering capable boards, SOEs can operate independently, appoint skilled managing directors and CEOs, and compete on an equal footing with private companies.

The appointment of competent Boards has assumed higher significance after the new corporate law in Pakistan has given enormous powers to the Boards to hire and fire MDs without seeking the approval or even concurrence of the line ministry or the federal cabinet.

Promoting fair competition:

To maximize SOEs’ potential, it is vital to create a level playing field by promoting fair competition. This entails ensuring that regulations and policies treat SOEs and private enterprises equitably, removing preferential treatment or unfair advantages. By embracing fair competition, SOEs are motivated to improve efficiency, foster innovation, and enhance overall performance.

Striking the balance:

While advocating for reduced government interference, it is important to acknowledge the need for appropriate regulation and oversight. The government’s role should transition from micromanagement to a supervisory one, ensuring adherence to ethical practices, transparency, and alignment with national objectives. This balance enables SOEs to operate efficiently while still being accountable to super shareholder through federal audit and umpteenth regulatory and parliamentary oversight bodies.

Copyright Business Recorder, 2023