Privatisation and SOE management in CPEC era

Until recently, the warm public debate on nationalisation and privatisation has been conducted largely in terms of ideology and dogma. It is encouraging that in books published this year two leading economists counsel pragmatism instead.

Ishrat Husain writes that the decision whether to privatise or not “should be guided by pragmatic considerations rather than for ideological and dogmatic reasons”, whereas Hafiz Pasha spells out that “privatisation should be promoted only of state companies operating in a competitive environment in industry, finance and trade, but that this process should be strictly avoided in the case of natural monopolies and of strategic assets like natural resources”.

This creates a space for discussing not only how best to privatise but also how best to manage state-owned entities (SOEs). Few realise that in 2014-15, the latest year for which official data is available, Pakistan’s 183 SOEs contributed almost as much to GDP as the entire agricultural sector. With assets worth Rs10.823 trillion (almost $100 billion), SOEs employed over 402,000 people, and contributed Rs65.8bn in non-tax revenue in the form of dividends.

Our experience of privatisation has not been uniformly favourable. A 1998 Asian Development Bank study found that after privatisation in Pakistan more than 20 SOEs were stripped of assets and closed down. Of those remaining, only 22 per cent showed improvement, 44pc showed no change, and 34pc were worse.

Given the size of the SOE sector, its role in the economy and the government’s responsibilities to control monopolies and ensure social justice, there is a need to have a more substantive strategy for SOEs than just privatisation.

There is additional interest in this area owing to expected inflows of capital under China-Pakistan Economic Corridor (CPEC) projects. Under the multibillion-dollar project, investments of more than $60bn are envisaged in agriculture, infrastructure, financial sector, tourism and other manufacturing facilities.

A large number, if not all, of these industries will be set up in partnership with Chinese SOEs. Most of them would like to see these joint ventures managed like Chinese public enterprises. There are no magic bullets in public policy. The government needs to develop a rational integrated policy for managing all public assets in the public interest

Our dilemma will be to reconcile our policy of privatising old SOEs while setting up new ones under CPEC. Fortunately, we have a rich experience in efficient management and reform of SOEs, which needs to be revisited on a priority basis. It is widely believed that state-owned enterprises in Pakistan are a legacy of the nationalisation of the 1970s. This is only partially correct.

In fact, starting with the establishment of the Pakistan Industrial Development Corporation (PIDC) in 1952, the foundations of state-owned enterprises (including Wapda and KESC) and development finance institutions (including Picic, IDBP, NDFC, ADBP, NIT and ICP) were laid in the 1950s and 1960s with the advice, encouragement and financial support of all our bilateral and multilateral lenders.

This reflected received wisdom of the times that government should lead economic growth by direct investment and encourage the private sector to follow suit.

This approach led to highly successful development of industry, finance and capital markets over the 1950s and 1960s. Not only were SOEs well run, but by investing in critical sectors of the economy, the PIDC was able in due course to transfer numerous successful projects — in urea, penicillin, paper, etc — to a risk-averse private sector. It is time to revisit this experience and devise appropriate rather than fashionable solutions to our problems.

There are no magic bullets in public policy. The government needs to develop a rational integrated policy for managing all public assets in the public interest.

As a component of this strategy, the privatisation programme can continue, but it should be restricted to those enterprises that sell in competitive markets (unlike PIA, telecommunications, oil and gas, and most power projects), be subjected to careful cost-benefit analysis (not just before and after, but also with and without privatisation), and be based on a comprehensive review of the lessons of our experience so far with privatised SOEs.

There is a suspicion that while assets have been sold, liabilities have been retained and through sovereign guarantees further contingent liabilities assumed (Rs936.9bn, in addition to SOE debt of Rs1.107tr, both on June 30, 2017). If privatisation is to strengthen public finances, it should lead to improved operational efficiency and not sickness, losses, asset-stripping and closure. Finally, the process should ensure that the transaction takes place without any hint of corruption.

At the same time, it should be realised that not all SOEs should or can be privatised. In the past, we were unable to pursue sensible policies because dogma and ideology came bundled with the loans which we were forced to seek since 1988.

What Mr Pasha and Mr Husain are now advocating is exactly what the National Economic Council approved in 1991, in the Approach Paper for the eighth five-year plan (1993-98), but was stopped by the IMF from pursuing:

“The question of ownership is less important than managerial autonomy. There is a need to link management rewards to enterprise performance, as is presently being done in public enterprises under the signalling project.

“The essential issue is to provide large enterprises with freedom from ministerial and bureaucratic control in setting their own prices, procuring their own material, and awarding their own sub-contracts. The location of actual ownership is not of prime importance.”

The advantage of ideology is that it relieves the policymaker of the burden of thinking, hard work and responsibility for outcomes. An integrated strategy for management of state-owned assets calls for all three, on a continuous basis, and can only be sketched here.

In order to formulate, execute and monitor this strategy a high-level central body — like the State Assets Supervision and Administration Committee in China — needs to be created. This could be a reorganised and restructured Ministry of Privatisation, or a statutory commission.

The strategy itself may be built by classifying all SOEs by function, size and environment: strategic vs non-strategic (financial vs non-financial); small and medium vs large; and natural monopolies and those operating in non-competitive output and input markets vs others. It is only the non-financial small (and possible medium-size) SOEs operating in competitive markets that should be privatised.

"Monitoring Desk"

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