Loss-making Public Sector Enterprises (PSE) and privatisation have been a national obsession for the last three decades. Successive governments, military and civil, have highlighted PSE losses as one of the biggest causes of the dire economic and fiscal situation. There has been an urgency to get rid of these institutions, and some have been offloaded through a hasty process. Apart from a few success stories in the banking sector, most have turned out to be not-so-good deals for the government or enterprises in question. The matter needs a value-driven business approach and has been mishandled because of oversight of PSEs by the bureaucracy. Dig deeper, and we will see that public sector enterprises have never been an issue but the lack of corporate governance structure because of bureaucratic control is causing these losses to the exchequer.
We hear a lot about the losses at public sector enterprises. The losses were around PKR 900 billion a year in the year 2022-23. This is an increase from PKR 700 billion the year before. However, when talking about public sector losses, only the cumulative sum of loss-making enterprises is presented, totally hiding the fact that there are many other PSEs that are leading to a hefty windfall for the government each year, through federal, provincial, and army-run businesses. As anyone with basic knowledge of business and finance would tell you, the performance of a conglomerate is cumulative of all its businesses. In the public sector in Pakistan, only the profit of Pakistan State Oil, Pakistan Petroleum Ltd, Mari Gas, and Oil & Gas Development Corporation Ltd is around PKR 400 billion and is expected to grow in the current year. The total loss of 50 federal government-owned PSEs was around PKR 158 billion in the year 2021-22 and PKR 202 billion in the year 2022-23. If we factor in the entire public sector stock, the PSEs portfolio is generating a net profit (provinces and Army).
It is noteworthy that a large chunk of losses comes from the power sector which is a dysfunctional sector and would unlikely have a buyer unless the government takes on and clears all liabilities and offers subsidies going forward, as it did in the case of K-electric. This basically means that the government will let go of control of all assets while opting for liabilities and will have to keep paying for those in the future.
Privatisation has been portrayed as the silver bullet that would rid the government of all the economic ills caused by the PSEs. The mantra has been prophesized by experts and technocrats, trained in the 80s and 90s with the Western knowledge repository of the 1960s and 70s. Well, the world started changing in the 1980s and a new model of corporate emerged in the 1990s and 2000s that now dominates the world. From the rise of China to the glowing success of Singapore and GCC, it is the PSEs that are driving global growth. Our problem is not that the state owns these enterprises but that the state has been unable to manage these enterprises because of a lack of structure and whims of the bureaucratic machinery. What is needed is not offloading these entities at throwaway prices and accumulating future costs and liabilities, but a plan to restructure these entities. Above all, the government’s approach to owning PSEs needs radical restructuring. The takeaways are not rocket science and have been applied successfully by countries left, right, and centre.
There are two aspects to this restructuring and reform, one is structural and the other is operational. On the structural front, the government should consolidate these holdings under one portfolio holding company that should manage all its businesses and should provide strategic direction and oversight to the entire enterprise. For this, Temasek Holdings of Singapore offers a very good framework. The holding company and its board should comprise professionals who should set profitability targets, in line with the government’s economic and social objectives. The strategic emphasis should also be on eventually securing a global footprint for these large enterprises.
Secondly, we will need to come to terms with the fact that Pakistanis in terms of human resources and top-level management exposure are an average nation, for now. So, it is imperative to hire the best global talent to run the holding company (to be formed) and the PSEs. This is the model that has been used successfully by G.C.C. nations who are always keen to engage the best global talent to run their investment funds and PSEs. Companies with revenues in hundreds of millions of dollars can afford A-class global management.
Also, the government officers (bureaucracy) should be kept away from corporate governance or management of these entities. This is critical for two reasons. One, running businesses falls beyond the core area of competency, which is public administration. And second, it creates a clear conflict of interest. To understand the conflict of interest, one need not go beyond the board remuneration package for PSEs that cannot have serving government servants on the board (e.g., State Bank of Pakistan), and the entities of similar or smaller sizes where the government servants serve on the boards of PSEs. The holding company and PSEs need to be run by the best global talent with no interference from the government in management or the board, apart from the appointment of the talent on merit.
For start, the government can keep power sector companies and Railways out of this portfolio and they can be restructured, following the same principles, and added to the portfolio or be managed through separate holding entities. The same principles can be applied to provincial and army-run PSEs.
This restructuring will ensure sound and efficient governance of state-owned enterprises. It will also help restructure sick PSEs and enhance the efficiency of profit-making PSEs. The injection of global talent will also lead to the development of local talent and a more robust corporate culture. It will also help remove the dichotomy where the government wants to get rid of some PSEs while planning to keep others, to be run inefficiently.
In its early years, we experimented with the government creating large industrial units through PIDC and handing them over to the private sector. In hindsight, that did not contribute to our national productivity or exports and did not benefit the state at large. The same approach has been hashed and rehashed over and over again. It is time to take a step back and do what is working for countries around. The people of Pakistan, like any investor, deserve a good return on their investment.
