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Reforming PSEs

The issue of State-owned Enterprises (SOEs) has been in focus in Pakistan for the past many years. The increasing fiscal deficit has further sharpened the focus on the losses of SOEs, and most analysts advocate privatization as its solution. However, keeping in view the experience at the national and international economic level, this is not a viable solution. Despite all the privatization efforts, SOEs remain on the economic scene. It is, therefore, imperative to review Pakistan’s experience of managing SOEs and their operational efficiency.

Introduction

Pakistan has had a rich experience in reforming and managing the public corporate sector. Some of the reform efforts in Pakistan led to development of management systems that are globally known. They are currently operational in countries like India, Kenya, and Brazil. With this rich experience, it will be useful to benefit from our past experiences and address the losses of SOEs.

Historical Perspective

SOEs play a critical role in the economy of Pakistan. They have a role and size that is in line with those of the global norms. The enterprises remain prominent in major sectors of the economy, i.e. energy, air and rail transport, electricity, gas, water supply, and the financial sector. They also comprise one third of the total stock market capitalization. Despite privatization, there are still more than 100 SOEs which contribute about 10 percent of GDP.  In most of the sectors of the economy the lead/major enterprises are from the public sector. It may also be mentioned that SOEs in Pakistan have increased from 12 at the time of independence to more than 100 today. Private sector was considered the engine of growth in all the major economic policies such as the Industrial Policy of 1948, etc.

Reasons for Growth

1. A shy private sector or inadequate private investment.

2. Need to use foreign aid/ funds for specific projects.

3. Projects such as Harnai Woolen Mill, and Dir Forest Project set up for development of backward regions.

4. Introduction or promotion of new technologies and industries, like urea and polyester fibre.

5. Strategic goods industries such as Pakistan Steel Mills set up to promote capital goods industries.

6. Establishment of infrastructural enterprises such as those related to railways and roads, etc.

7. Public sector expansion with the objective of controlling commanding heights of economy during 1972 to 1977 when 33 large manufacturing enterprises were nationalized.

Contribution of SOES to Economy

The role and performance of SOEs in Pakistan has been chequered. And though a significant contribution has been made by these enterprises in their respective areas, there are also allegations of their being inefficient and unethical.

A. Positive Contributions

1. Establishment of an industrial base in Pakistan through PIDC.

2. Signing of Indus Basin Treaty by WAPDA.

3. Provision of funds through the ADBP to the agriculture sector, etc.

4. Development of capital market via government-sponsored institutions, ICP, NIT, PICIC, and NDFC, etc., in the financial sector.

Privileges to SOEs

Frequently resources were allocated to SOEs at favourable/ preferable terms. Some of the privileges enjoyed by SOEs were as follows:

1. SOEs got priority in the allocation of resources, especially in procurement of funds from the banking sector.

2. Number of SOEs enjoyed preferential treatment while borrowing by availing sovereign guarantee.

3. SOEs enjoyed monopolistic position by acquiring the status of first right of refusal in a number of areas.

Rise of Public Sector

Public corporate sector in Pakistan acquired a prominent position by the late 1980s. During this period, barring a few years during the early 1970s corporations were set up in all facets of the economy. Its importance was acknowledged when public corporate sector was discussed as a separate sector in the Third Five Year Plan.

Some of the major corporations like WAPDA took pride in making appropriate use of its independence in a positive manner. Public corporations were a unique organizational device for achieving the given objectives in the major areas of the economy.

Government Control

One of the major reasons for this importance of the corporate bodies during this period was government’s focus on their administration. An important step was the enactment of the Public Increments (Financial Safeguard) Ordinance NOXLVI of 1960. Among other steps, this ordinance recommended that the CFOs of the public corporations were to be representative of the Ministry of Finance and must report directly to the ministry and not to the chairman of the corporation. This indeed was an attempt by the federal government to strengthen its control, but it was also an attempt for strong accountability. This just indicates the importance given by the government to this sector.

Performance Appraisal

The corporate bodies were also managed with a laid down system of information disclosure. Two of the major annual reports of the performance of corporation sector were:

1. Government Sponsored Corporations, which provided a write-up and review of all the major corporations. The report was presented to and placed before the parliament.

2. Annual Report on Public Industrial Sector, published by the Experts Advisory Cell of the Ministry of Production, that contained a detailed analysis of 75 large public sector manufacturing enterprises.

Decline of SOEs

The performance of public corporate sector experienced a major downswing during the 1970s. The primary reason was sudden expansion of public sector due to nationalization in most of the sectors of economy such as manufacturing, finance, medium and small enterprises including education and health. This sudden expansion of the public sector was beyond the existing management capacity of the then government. Even in the post-1977 period, the public sector continued to expand due to the various projects under-implementation which were initiated in the earlier period. This resulted in continued performance deterioration and resultant losses, in turn increasing fiscal deficit. The government established a number of committees and task forces under various senior professionals such as HU Baig and NM Uquaili, etc.

Prof LP Jones Report

The report which made a major impact on the SOE sector was prepared in 1981 by a consultant from Harvard/ Boston University Prof LP Jones. The report titled “The efficiency of manufacturing enterprises in Pakistan,” identified that the then management system in Pakistan was antiquated and needed major reform efforts. It focused on the public manufacturing sector, its organization, and autonomy structure and recommended a comprehensive reform programme.
In the post- 1977 period public industrial sector in Pakistan was managed by the Ministry of Production. The ministry with the assistance of a highly professional body, i.e. Experts Advisory Cell (EAC) controlled 75 Public Industrial Enterprises (PIEs) through 8 holding corporations. The report by LP Jones identified that there was a poor autonomy structure which was over-centralized and which had little delegation of power.

How to Reform?

To improve the efficiency and performance of the PSEs, the government must carve out a roadmap for restructuring with the ultimate object of making them commercially viable entities. Reform of PSEs in Pakistan is essential as they account for a sizeable share of the country’s GDP and employment and they contribute a considerable portion of direct and indirect taxes. Following recommendations can be helpful in this regard:

1. Reasons need to be enunciated for the government to own or control companies that are deemed critical to Pakistan’s security and economic wellbeing. A rationalisation of the current list of PSEs into those that are of strategic importance or those which are for special assignment is needed to focus government attention towards privatisation or corporatisation.

2. All remaining PSEs should be brought under standard legal structures. Proper compilation of accounts and information sharing will enhance overall transparency.

3. For those remaining under government control, the majority shareholder needs to clearly articulate the mandate and key performance indicators for the PSEs. This should be kept distinct from the government’s function of policymaking, market regulation or social obligations.

4. PSEs have to be managed on a sound commercial footing and held accountable for the judicious use of public resources. PSEs should make full disclosure of tradeoffs they face in terms of costs and quality of delivery. The budget should annually provide for financing of the required shortfall or subsidies in a transparent manner.

5. State ownership should not create a competitive edge for the PSEs. There is a need to ensure a level playing field by nurturing competitiveness in markets. Competition will enhance economic efficiency and innovation.

6. There is also a need to enhance the role and capacities of the sector regulators and the Competition Commission to examine the PSEs’ role in sectors which often operate as “natural monopolies” (even if private entry is allowed) and examine whether state ownership is ensuring an adequate level of service provision.

7. There is probably no institution better placed than the board of directors to ensure good corporate governance at the entity level. Therefore the primary focus of corporate governance reform of PSEs needs to be on the selection of qualified and competent people on the board of directors of these entities.

8. The appropriate mechanism needs to be put in place that ensures the right selection and continuous monitoring of the members of the board, divorced from political interference. This mechanism could take the form of a separate government department, similar to the Department of Public Enterprises in India.

9. Professionals need to be tapped for the steering committee, applying the same fit and proper criteria developed for individual board members of PSEs. Ex-officio membership from ministries should be discouraged as should institutional representation.

10. If the above corrective measures prove inadequate to stem the rapid deterioration in the PSEs, a more radical shift towards centralised ownership models may be required.

Conclusion

As with all reform measures, the implementation has to be in “letter and spirit” so that its chances of success are not sacrificed at the altar of political expediency.

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