Reforming public sector enterprises

A setback to privatisation took place in 2006 after the Supreme Court nullified the Pakistan Steel Mills transaction. Most estimates prepared by independent analysts have placed the losses incurred by the Steel Mills in the last few years around Rs100bn. The private buyers had planned to expand capacity to 3 million tonnes, which has remained elusive under the public ownership. — File Photo

ON the eve of the federal budget 2011-12, focus must necessarily be on the public sector enterprises which drain away a significant chunk of government resources each year.
Pakistan was among one of the few developing countries in the early 1990s which initiated the process of privatisation of state-owned enterprises. Successive governments pursued the same policy and the results have been quite impressive.
Telecom, banking and financial services, cement and automobile sectors have performed extremely well and attracted substantial investment both from foreign and domestic investors after privatisation. For example, HBL and UBL were given a capital injection of Rs41 billion to compensate for their losses under government ownership. Since 2005, after they were privatised both banks are paying dividends, corporate tax to the government and the residual value of government shares has risen several fold.
A setback to privatisation took place in 2006 after the Supreme Court nullified the Pakistan Steel Mills transaction. Most estimates prepared by independent analysts have placed the losses incurred by the Steel Mills in the last few years around Rs100bn. The private buyers had planned to expand capacity to 3 million tonnes, which has remained elusive under the public ownership.
The magnitude of the subsidies (explicit and implicit), concessions, financing, losses underwritten, bank borrowing guaranteed by the government , foreign loans for all the state-owned enterprises, companies, entities and corporations owned and managed by the federal and the provincial governments has never been computed but my guess is that these liabilities, including the contingent liabilities, would run into several billion dollars.
Had these companies been providing satisfactory services or catering to the needs of the general public this burden being borne by the taxpayers could have been defended but their performance and service standards are so dismal that they have become a source of pain and agony to the ordinary citizen and a disruptive force in our economic advancement.
Despite the stark evidence about the haemorrhaging caused by these corporations why has the privatisation process stalled for last five years? There are at least three factors that can explain this hiatus. First, there are well-meaning Pakistanis who are genuinely apprehensive that these assets will be sold to the cronies of the people in power in a contrived manner and this will cause more damage than good to the economy.
This is a legitimate concern but can be addressed by designing the sale transaction in a transparent manner carried out openly in full public view through the media. The oversight by the parliamentary committees and the scrutiny by the judiciary and the media should minimise this risk.Second, the ministers and the bureaucrats in charge of these corporations enjoy a lot of perks and pelf by controlling the appointments, transfers and postings, award of contracts, etc. In other words, these enterprises are a source of political patronage and nobody would like to let this go.
This problem can also be resolved by taking them away from the ministries and placing all the corporations under an independent holding company responsible to the cabinet division and accountable to the parliamentary committees. Only those of strategic nature should be retained under the direct control of the ministries concerned.
Third, many Pakistanis are opposed to privatisation on the grounds that the sale of the ‘family silver’ will result in further concentration of wealth and growing inequities, unemployment and higher prices to the consumers. Empirical evidence shows that a strong regulatory agency with competent manpower and enforcement capacity can ensure that competition takes place, consumer interests are protected and divested shares are distributed to a broad ownership.
Initially, a certain percentage of shares can be floated at the stock market earmarked only for small investors followed by the sale of controlling shares to strategic investors who have to be screened through a pre-qualification process.
Some of these corporations are in such a bad shape that it would be difficult to find genuine buyers for them. They have to be restructured in the first instance without incurring major financial expenditure. The board of directors and chief executives have to be appointed for a fixed tenure and assigned time-bound goals and targets. They will have to be provided resources and operational autonomy but held accountable for results.
There is a tendency among the incumbents to prolong their term so that they can continue to enjoy the benefits and power of the office.
The tenure should therefore be made coterminous with the completion timeline of restructuring. It should also be ensured that the board and CEOs cannot be transferred or removed arbitrarily and prematurely.
Some enterprises may have to be retained in the public sector for strategic or public policy reasons. These should function under an independent board of directors appointed by the government. In case they require budgetary support the ministry concerned and the Ministry of Finance should be represented on the board but all operational decisions have to be taken by the board itself. The enterprise or the corporation should enjoy the freedom to hire and fire the employees, fix the compensation and carry out day-to-day operations without any interference from the ministry. Their accounts should be audited by the Auditor General and examined by the Public Accounts Committee.
If faithfully implemented these reforms would result in an estimated annul budget saving, conservatively estimated, of one per cent of GDP, thus lowering the fiscal deficit by that amount. The lower fiscal deficit would in turn have a beneficial impact on government borrowing from the banking system, future debt-servicing obligations and easing of inflationary pressures.
The writer is a former governor of the State Bank.