Offloading State-Owned Enterprises is Not the Only Way-Out

By Muhammad Soban

ISLAMABAD, Nov 09 (INP-Wealthpk) Privatization has always been a hot topic for debate in Pakistan, as almost in every program, the International Monetary Fund (IMF) asks Pakistan to privatize its sick state-owned enterprises (SOEs) and save the state exchequer from the financial losses. But the question arises if privatizing the SOEs is the only solution available to the country.

The Ministry of Finance issued a report in March this year titled ‘State-Owned Enterprises Triage: Reforms & Way Forward’, identifying which state-owned SOEs should be retained and which should be privatized or liquidated. According to the report, there are 212 SOEs, including subsidiaries, trusts, and funds.

The report has divided the SOEs into commercial and non-commercial groups. There are 85 commercial, 44 non-commercial, and 83 subsidiaries of the commercial SOEs. These SOEs generated approximately Rs4 trillion revenue (10% of GDP) in 2018-19, while the value of their total assets was Rs19 trillion. These SEOs have employed more than 450,000 people constituting 0.8% of the workforce.

According to the report, the financial health of some of these SEOs was unsatisfactory and the net losses were Rs143 billion in the Fiscal Year 2018-19 compared with Rs287 billion losses during the Financial Year 2017-18.

In 1990s, Pakistan privatized 97 SOEs in three sectors, including 87 in the industrial sector and five each in the financial and utilities sectors, generating Rs60 billion.

Privatization is a complicated, multifaceted, and politically sensitive process. A well-devised system of privatization cares for all the stakeholders of economy.

Former secretary of the Planning Commission of Pakistan Dr. Akhtar Hassan Khan has mentioned different opinions for privatization in his study “Is privatization in Pakistan purposeful?”

The first view is that there should be a free market and the government’s role should be confined to regulation, while the management, ownership, and operations of industries should be in the hands of the private sector. But according to a distinguished economic historian, Alexander Gerschenkron, the public sector plays an important role in developing economies that started their development race rather late. According to him, the public sector can contribute to economic growth where the private sector is shy to invest and is inexperienced.

The second view is that the private sector performs well and is more efficient than the public sector. But according to the famous study of Syed Nawab Haider Naqvi and A.R Kemal, it is a misconception that the private sector performs well and efficiently. They compared the public and private sector industries producing the same goods. Their study concluded that a shift from the public to private sector was neither necessary nor sufficient condition for efficient operation of the enterprises. However, they stated that it was often correctly claimed that political interference and overstaffing led to decreased public sector efficiency.

The third view is that privatization is necessary for reducing fiscal deficit, as the public sector entities face persistent loss that is financed through the budget. To minimize these losses, the SOEs must be privatized. But statistics show that after nationalization, the public sector enterprises paid double taxes compared to the pre-nationalization period. Moreover, if the public sector entities are making huge profits, privatizing them would negatively affect the budget.

Another argument is that privatization encourages foreign direct investment (FDI) but it is not beneficial for economy if a foreign investor invests in an already profitable public enterprise. Therefore, foreign direct investment should be enticed by policy and design into new and risky ventures rather than the purchase of profitable enterprises. In fact, when a foreign investor purchases a profitable public unit, it does not increase the country’s capital stock.

Privatization of SEOs is not the solution and a comprehensive policy on their management is the need of the hour. The government should appoint industry experts to manage these SEOs and make them profitable, as they are the primary source of revenue generation for the government.