Time and time again, we reach a point in our economy where the subject of privatization emerges as a discussion of a concern. Once again, the incumbent government is accelerating its plans to privatize state-owned enterprises (SOEs) in a bid to fuel the economy financially and ease the burden of the country’s growing public debt.
“There are two basic things we need to work on, namely coming up with better laws and better ways to privatize state-owned companies, and improving their governance,” noted Finance and Revenue Minister Miftah Ismail.
The International Monetary Fund (IMF) highlighted the need to overhaul the country’s state-owned enterprises as a key reform priority in its July 2022 report on Pakistan and specified some of the tasks to be undertaken by the Pakistani government. According to the World Bank, the total liabilities of chronically loss-making public enterprises – defined as public sector companies that have lost money in three of the previous five years – exceed 8% of GDP.
However, there have been many attempts at privatization since the 1950s, which began with the establishment of the Pakistan Industrial Development Corporation (PIDC). However, as the country shifted towards nationalization in the 1970s, we witnessed an explosion in the number of state-owned enterprises, a number that still stands at 212. These are broadly divided into 85 commercial state-owned enterprises ( with 83 subsidiaries attached to one or the other) and 44 non-commercial entities (such as trusts, foundations, regulatory bodies, universities, research and training institutes, promotion and defense and social funds). A recent SOE screening exercise conducted for commercial SOEs (consolidated with subsidiaries) revealed that these SOEs account for 98% of government assets and nearly 100% of government losses. This exercise clarified the multiple sources of government risk exposure by calculating items such as recurrent grants (explicit and implicit), concessions, unfunded obligations, tax and tariff exemptions, guarantees, bank loans, pension liabilities and foreign loans.
A big lesson to be learned from China is the concept of ‘zhuada fangxiao’, which has led to a wave of mergers and the privatization of small businesses.
In 2021, 44 public enterprises were to be privatized, a process that took too long and was prolonged due to political obstacles and COVID-19. We have a plethora of documents that establish extensive frameworks and policies, and numerous commissions and committees, all ineffective and unsuccessful in their efforts to improve public enterprises. In the list of top ten loss-makers are Pakistan International Airlines (PIA), Pakistan Railways, power companies and the National Highway Authority, which account for about 90% of the total losses each year. Loss-making SOEs increased GoP’s overall liabilities by PKR 143 billion in FY 2019. Even in the case of profit-making SOEs, such as oil and gas industries, operational efficiency and profitability compare poorly with those of their private sector counterparts around the world. Thus making these challenges the real underlying challenges for Pakistan.
Data from a multi-country longitudinal study (JD Brown, JS Earle, A Telegdy – Journal of Political Economy, 2006) reveal that privatization increases the productivity of firms that were previously under state control. The real challenge in the case of Pakistan is the inability of policy makers and politicians to design a comprehensive privatization action plan. We learn a lot from the Chinese case of relations with state-owned enterprises which gradually started by transforming state-owned enterprises into modern and competitive enterprises. This was followed by a wave of mergers and privatizations of small businesses. A process that stretched over four decades and culminated in a complete transformation into the world’s second-largest economy driven by technology and innovation from an agrarian state.
China has chosen to start by preparing the economy for the transition by building the necessary institutions and property rights infrastructure, as well as transforming state-owned enterprises into modern and competitive companies. Despite 40 years of close and continuous collaboration with state-owned enterprises, they have been identified as an organic component of China’s political and economic governance, although their contribution to national output has dropped to 40%. According to Chinese experts, state-owned enterprises are still seen as important economic building blocks that serve as a buffer against internal and external shocks. The COVID-19 outbreak has served as an example, as the pandemic has caused a deep internal shock and continues to endanger the economy due to the cautious easing of containment measures and the drop in global demand. . The Communist Party of China (CCP) has come to realize that state-owned enterprises are not always flexible and efficiently managed and therefore it continuously advocates for institutional and enterprise-level reforms to address the stagnation growth and the increase in debt, which reached more than 300% of GDP in 2019.
Today, this understanding of how SOEs work by Chinese experts can be a major first step towards refining existing frameworks or crafting a new privatization strategy. Instead of several commissions, we need a standing commission on public enterprises made up of the head of the reform committee, the ministry of commerce and the ministry of industry who not only identify the true value of a public enterprise, but also its productivity, efficiency and competitiveness. Another big lesson to learn from China is the concept of “zhuada fangxiao” – seize the big, release the small. This philosophy has resulted in a wave of mergers into groups and privatizations of small companies that are too costly to control. Companies previously owned by state agencies and working in comparable industries have seen their owners own companies wholly owned by the State Assets Administration and Supervisory Commission (SASAC). Currently, the central government directly owns 97 huge stakes, which account for the majority of state-owned assets and are considered the most strategically important enterprises. The latest study shows that public companies operating under the supervision of SASAC have superior governance than some of their private organizations.
Therefore, I strongly believe in the Chinese model of privatization, which could have a huge impact on the performance and structure of Pakistani SOEs in the future, because it is undeniable that privatization is both necessary and inevitable.
The author is the General Secretary for Foreign Affairs of BRI College, China. He tweets @DrHasnain_javed.