The chaotic pursuit of privatisation of SOEs

Last week, Finance Minister Muhammad Aurangzeb reported “very good progress” on privatising loss-making Pakistan International Airlines (PIA) and outsourcing three airports. Meanwhile, the Privatisation Commission of Pakistan is reportedly busy devising a new three-phase strategy to privatise state-owned entities (SOEs), barring those considered of national or strategic importance.

The current privatisation list focuses on loss-making public enterprises and prioritises entities like PIA and power distribution companies to reduce the government’s involvement and haemorrhage of taxpayers’ money.

The massive annual losses of Rs500 billion incurred by the SOEs, which form a part of growing public expenditure, have become a major drag on the national budget, with their accumulated losses topping Rs2.5 trillion or nearly $9bn.

Moreover, the financial burden of these resource-guzzlers, apart from haemorrhaging government budgets, has also become a source of systemic risk for the financial sector.

The World Bank has pointed out in a report that the profitability of SOEs in Pakistan had been declining and turning into losses for about a decade. Things have come to a stage now where “the profitability of Pakistan’s federal SOEs is the lowest in the South Asian Region” as their aggregate profit at 0.8 per cent of GDP in 2014 turned into losses worth 0.4pc of GDP in 2020 and, growing, thus becoming a major driver of fiscal deficit and source of substantial fiscal risk.

But successive governments, despite being cashstrapped, have gladly bankrolled these SOEs with borrowed money. However, many believe that with little easy money available to continue financing their losses through borrowings, the government has no option but to eliminate them.

The current privatisation initiative, undertaken under the army-backed Special Investment Facilitation Council (SIFC), aims to sell shares of certain public assets to investors from friendly Gulf countries.

The authorities expect a massive investment of more than $50bn from the United Arab Emirates (UAE) and Saudi Arabia alone over the next five years. So far, however, only a fraction of the investment has been made by investors from these two countries in Karachi Port and a private oil marketing company.

Privatisation of loss-making public entities and improvements in the governance of others are also major goals of the ongoing International Monetary Fund (IMF) rescue loan as part of structural reforms. They will also be major conditions of the next medium-term bailout Pakistan is seeking from the lender of last resort. According to reports, the IMF wants early privatisation of PIA, Pakistan Steel Mills, RLNG power plants, and electricity distribution companies.

According to Muslim Commercial Bank Limited chairman Mian Mohammad Mansha and former State Bank of Pakistan Governor Shahid Kardar, successive regimes have overstretched the mandate of the Pakistani state, burning huge holes in its budget.

“This has resulted in its inability to perform, efficiently and effectively, what should be its core functions, security of life and property of its citizenry, and provide justice and some basic social services, responsibilities that it must pay for and provide.

“This private behaviour is rational since these choices are being made based on service quality. But they resist privatisation because there would be reduced opportunities for ‘patronage’ [an appropriate all-embracing term in our context] or earnings as fees or junket trips as directors of these publicly owned entities,” they have argued in a joint op-ed for this paper.