Is Privatisation Unnecessary or Unavoidable

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Dr Hasnain Javed

A great lesson to learn from China is the concept of “zhuada fangxiao,” which resulted in a wave of mergers and the privatisation of small enterprises

Time and again, we reach a point in our economy, where the topic of privatisation emerges as a discussion of a concern. Once again the incumbent government expedites its plans to privatise State-Owned-Enterprises (SOEs) in an attempt to financially fuel the economy and release the burden on the country’s rising public debt.
“There are two basic things we need to work on, that is to come up with better laws and better ways to privatise SOEs, and to improve their governance,” remarked the Minister for Finance and Revenue Miftah Ismail.
The International Monetary Fund (IMF) underlined the need to overhaul the country’s SOEs as a key reform priority in its July 2022 Report on Pakistan and specified some of the tasks to be undertaken by the Pakistan government. According to the World Bank, the total liabilities of chronic loss-making SOEs – defined as public sector enterprises that lost money in three of the previous five years – exceed eight per cent of GDP.
However, there have been numerous attempts at privatisation since the 1950s, which began with the establishment of the Pakistan Industrial Development Corporation (PIDC). However, as the country shifted gears to nationalisation in the 1970s, we saw an explosion in the number of SOEs, a number that still stands at 212. These are broadly divided into 85 commercial SOEs (with 83 subsidiaries attached to one or another) and 44 non-commercial entities (such as trusts, foundations, regulatory bodies, universities, research and training institutions, promotional and advocacy bodies and welfare funds). A recent SOE Triage exercise conducted for commercial SOEs (consolidated with subsidiaries) revealed that these SOEs account for 98 per cent of the government’s assets and nearly 100 per cent of its losses. This exercise clarified the government’s multiple sources of risk exposure by computing things such as recurring subsidies (explicit and implicit), concessions, unfunded obligations, tax and tariff exemptions, guarantees, bank borrowings, pension liabilities, and foreign loans.
In 2021, 44 SOEs were set to be privatised, a process that took too much time and lingered on due to policy hurdles and COVID-19. We have a plethora of documents that lay out extensive frameworks and policies, and numerous commissions and committees all ineffective and unsuccessful in their efforts towards improvement in SOEs. Making into the list of top ten loss-makers, are Pakistan International Airlines (PIA), Pakistan Railways, power companies and the National Highway Authority, accounting for around 90 per cent of the total losses each year. Loss-making SOEs increased the overall GoP liability by PKR 143 billion in FY 2019. Even in the case of profit-making SOEs, such as the oil and gas industries, operational efficiency and profitability compare poorly to their private-sector peers globally. Hence making these the true underlining challenges for Pakistan.
Evidence from a multi-country longitudinal study (JD Brown, JS Earle, A Telegdy – Journal of Political Economy, 2006) reveals that privatisation increases the productivity of enterprises that were previously under state control. The real challenge in Pakistan’s case is the incapability of the decision and policymakers to devise a comprehensive privatisation action plan. We learn so much from the Chinese case of dealing with the SOEs which began gradually by reforming state-owned enterprises into modern competitive companies. This was followed by a wave of mergers and privatisation of small enterprises. A process that was stretched over four decades and resulted in a complete transformation into the world’s second-largest technology and innovation-driven economy from an agrarian state.
China chose to begin by preparing the economy for the transition by building the necessary institutions and property rights infrastructure, as well as reforming SOEs into modern competitive corporations. Despite 40 years of continuous close working with the SOEs, they have been identified as an organic component of China’s political and economic governance, although their contribution to the national output has shrunk to 40%. SOEs according to Chinese experts are still regarded as important economic building elements that serve as a buffer against internal and external shocks. The COVID-19 outbreak served as a prime example, as the pandemic caused a profound internal shock and continues to endanger the economy due to cautious relaxing of lockdowns and declining worldwide demand. The Chinese Communist Party (CCP) realised that SOEs are not always flexible and efficiently managed, and as a result, it is continually advocating for institutional and firm-level reforms to address stagnant growth and increasing debt, which reached more than 300 per cent of GDP in 2019.
Now, this understanding of the functioning of SOEs by the Chinese experts can help serve as a major first step towards either refining existing frameworks or developing a new privatisation strategy. Instead of multiple commissions, we need to have a permanent SOE Commission consisting of the Head of Reform Committee, Ministry of Commerce, and Ministry of Industry who not only identify the true value of an SOE but also its productivity, efficiency and competitiveness. Another great lesson to learn from China is the concept of “zhuada fangxiao” – grasp the big, release the small. This philosophy resulted in a wave of mergers into groups and the privatisation of small enterprises that were too costly to supervise. Corporations previously held by state agencies and working in comparable industries have their owners moved to hold companies owned entirely by the State-owned Assets Supervision and Administration Commission (SASAC). Currently, the central government directly owns 97 huge holdings, which account for the majority of the assets owned by the state and are regarded as the most strategically significant firms. The latest study shows that SOEs operating under the supervision of SASAC have superior governance in comparison to some of their privately-owned organisations.
Therefore, I strongly believe in the Chinese model of privatisation, which may greatly impact the performance and structure of Pakistani SOEs in the future since there is no denying the fact that privatisation is both necessary and unavoidable.