Having attended IMC 2023 in Karachi from the 10th to the 12th, it is a great event thus taking a cue from the discussion scripting column for consideration of those at helms for good of SOE (State-Owned Enterprise). My tributes to NIMA for an excellent educative event.
The state of Pakistan’s economy has been a constant subject of discussion over the past month or so in the print and electronic media and is expected to remain as such in the coming days and weeks. Numerous scholars, several former finance ministers, and many economists, all far more learned than I, have gone on to expound on theories purporting to show what has gone wrong in our country. They have readily broached various patchwork solutions that they believe may be implemented in order to relieve Pakistan’s economy of its persistently paralyzing debt and under-productivity.
All arguments and theories always wind back to debt and under-productivity or as they are esoterically known to the more biblically disposed of sentimentalists; greed and sloth, theologized as part of the seven deadly sins. All of Pakistan’s problems, it is said, stem from its insatiable appetite for luxury and leisure at the expense of merit and hard work. This 221-million-strong country tends to consume disproportionately more than it can produce; to be precise it can consume USD 44 billion (the gap between imports and exports in 2021) more than it can produce.
Effectively, all past governments going back several decades, have presided over the country’s demise by proceeding to borrow money from international lenders, thus kicking the can down the road, with all of those funds eventually ending up subsidizing inefficiencies in Pakistan’s economy with no meaningful growth to speak of. Subsidizing inefficiencies in the economy here primarily means that the exchange rate has been kept artificially low, which has allowed the population to obtain an imported lifestyle and level of consumption that is not consistent with what they have managed to produce. In other words, the artificial strength of the Rupee has subsidized imports to the detriment of exports.
This is synonymous with Greece’s suffering during the eurozone crisis in 2009, where the debt levels spiraled out of control simply because the Greek economy was not sufficiently productive, with inconsistently high-income levels. The Greeks kept borrowing and borrowing without thinking about how they will finance the ever-increasing debt servicing costs. Eventually, after undertaking painful reforms and going through a long and severe recession which saw a large chunk of their skilled population emigrating, the Greek economy became more competitive due to deflation, with Greek wages falling by around 20%. From a humanitarian point of view, all of this may sound cruel but unfortunately down turns in economic cycles cannot be appeased or wished away. The creditor will always want his pound of flesh and unless countries proactively manage their finances and the economy as a whole, this will always be the end result; the invisible hand at work automatically seeking to correct market imbalances by whatever means necessary.
Work side by side
Certain segments of the population are guiltier than others. The elites simply do not understand that while their personal bank accounts may be larger than life, allowing them to act with impunity, the collective bank account of the country, in which they are but an equal shareholder along with the rest of Pakistan’s population, i.e. Pakistan’s foreign exchange reserves, is in crisis (currently with net negative equity). This effectively makes their personal billions worthless. Leaving the problem to nameless others has never been a viable solution. It is incumbent upon every citizen of this nation, who derives their livelihood from this soil, to act responsibly where the welfare of fellow citizens is concerned. Just as during the pandemic, health officials instructed the population to wear masks in order to avoid the spread of the virus, guarding themselves and others, so too now we must mutually act together to insulate Pakistan from foreign reliance.
Like an addict, even in times of crisis, Pakistan has not acted sufficiently to save its own skin. It was only through IMF’s interventions that Pakistan reluctantly took the harsh but essential measures in order to address the malaise rotting our state. Even though Pakistan has started to devalue its currency, it may no longer be sufficient as our reserves persist in their decline.
As per the State Bank of Pakistan, in January 2021, the monthly weighted average exchange rate was 160.52; the same time next year it was 176.75 and in January 2023 it was 235.25. This represents an overall devaluation exceeding 33% in a matter of three years. Similarly, Pakistan’s reserves in FY 2020-21 were USD 24.4 billion, in FY 2021-22 USD 15.5 billion and then in January 2023 USD 9.4 billion (USD 3.6 billion with the State Bank and USD 5.8 billion with commercial banks), with an overall decline of 61.5%.
Pakistan has been blessed with abundant resources as well as institutions, to the point where it is far better positioned to be self-reliant in this globalized world than other nations. We have ample tracts of agricultural land, energy as well as mineral resources, plentiful cheap labor, vast industrial capacity as well as private and State Owned Enterprises (SOEs) to marshal and coordinate all the factors of production.
Managing of SOEs
Pakistan must take up the initiative and immediately prioritize its domestic industry on a war footing. Inefficient and bureaucratic setups, particularly in SOEs have to be done away with. Just from the top of the head, a listed SOEs has to report to at least 12 separate entities including the Senate Standing Committee, National Assembly Standing Committee, concerned Ministry (and Minister), Federal Cabinet, FIA, NAB, Auditor General of Pakistan, the SECP, FBR, two external auditors for annual and half-yearly audits with the cherry on top of the cake being the Public Procurement Regulatory Authority. I am absolutely sure I missed a few more from inclusion in this illustrious list.
Any one of the aforementioned parties being unhappy or unsatisfied is enough for the top management to get the sack (and they regularly do) or even go to jail. With all these reporting and compliance operations, SOEs are incentivized towards doing nothing (if they do nothing then will not get into trouble for anything) or otherwise outsourcing their jobs to third-party contractors. Well-educated and experienced professionals are unwilling to join due to uncompetitive pay scales as well as persecution and public flogging of employees, which is creating a perennial vacuum of competent leadership. All this reporting has not dissuaded criminal enterprise within and around SOEs either; they have just shifted with the times to newer more discreet methods. So when the losses pile on, the SOEs are left helpless.
As per the State-Owned Enterprises Triage Report published by the Finance Division, there are currently 212 SOEs operating in various sectors of Pakistan, with 85 commercial SOEs and a further 83 subsidiaries of the commercial SOEs. The 85 commercial SOEs mainly operate in 7 sectors: Power, Oil & Gas; Infrastructure, Transport & Communication; Manufacturing, Mining & Engineering; Finance; Industrial Estate Development & Management; and Wholesale, Retail and Marketing.
The overall revenues of all SOEs in 2018-19 was PKR 4 trillion (approx.) representing 10% of nominal GDP, while the book value of their assets was PKR 19 trillion. Additionally, SOEs provided employment to more than 450,000 people which constitutes around 0.8% of the total workforce. In FY 2018-19, the commercial SOEs collectively recorded net losses of PKR 143 billion. Moreover, the sum of the losses of the top 10 loss-making SOEs contributes around 90% to the total losses of SOEs portfolio each year. NHA, Pakistan Railways, PIA and power sector DISCOs have been among the major, top 10 loss-making SOEs. Since FY 2015-16, SOEs have consistently incurred significant losses creating a heavy burden on the nation’s fiscal position.
A large chunk of Pakistan’s economic capacity is locked away in SOEs, mired in the lowest rungs of unproductivity, they have been left to languish for far too long. It should no longer be the state’s business to operate such entities on a commercial basis. The government should only monitor and guide the industry through effective policy measures to provide incentives to nurture and aid capacity building.
Precious taxpayer money gets injected again and again within these entities, yet they have not been able to stand on their own two feet and continue to hemorrhage. Those funds can be put to good use in long-term development projects for the good of the less privileged among us. This speaks volumes about the inept management at SOEs and politically motivated poor decision-making by leaders at the helm of the government.
Some SOEs have performed well over the years and have remained profitable. The largest and most profitable of these include Government Holdings (Private) Limited, Pak Arab Refinery Company and Pak Kuwait Investment Company (Private) Limited. All three of these entities have one thing in common. Their management and performance is not necessarily controlled by the Government of Pakistan despite having majority ownership. Government Holding (Private) Limited earns through exclusive rights of shareholding with international investment partners in Oil & Gas Exploration and Production sector; whereas Pak Arab Refinery and Pak Kuwait Investment’s managements are guided by its foreign, minority shareholders who are patently experienced professionals.
For all other SOEs, Pakistan has the bad habit of appointing career bureaucrats, who have absolutely no commercial experience or even technical knowledge of the concerned industry, to the Board of Directors (shockingly sometimes even getting themselves appointed as CEOs) which can only result in poor outcomes if the leadership is clueless about the industry and modern business management practices which has undoubtedly been the case. Oftentimes, these appointments are very short in tenure. They only last as long as the top management has the favor of the ministry or the government of the day. As soon as there is a change in the government or ministry, there are bound to be changed in the leadership at SOEs. These frequent comings and goings, repeatedly change the priorities of the SOEs themselves, with any long-term planning being impossible.
As per the aforementioned Triage Report, the government itself rates 21 entities, excluding the three mentioned above but including NBP, NTDC, PSO, PQA, PNSC and TCP as “Profitable SOEs” to be retained. However, this scribe is unaware if any efforts have been made to assess whether the so-called “good performance” was the best which could have been done.
The SOEs are generally being run at the whim of a chosen few, who are beholden to no system but instead their benefactors and appointers. In this environment, there are no long-term plans in place for the development of the entities and regard for the objective of profit maximization. Instead, projects which are the short-term priority of the government of the day are green-lit, even if they are financially unviable, with time, effort and resources of SOEs being wasted.
A case in point is Pakistan National Shipping Corporation (PNSC) which has remained profitable since the fiscal year 2000-2001. However, profitability is not the only criteria for success. PNSC’s vision and mission statement as defined on its website, setting the platform for the goals of the organization is unintelligible, lacking any sort of forward-thinking, oblivious of its responsibility to permeate the organization where all employees can meaningfully contribute towards the Corporation’s success.
The 2nd tier management at PNSC are professionals having an individual average of over 20 years experience in the industry. However, there is little that the 2nd tier management can do when the top leadership remains hamstrung in decision-making because it lacks the knowledge and experience to efficiently and effectively run a highly complex and specialized organization.
PNSC has remained plagued with people who are unable to make critical decisions in a timely manner because they lack a firm comprehension of the situation and risks associated with decision making due to which it is easier for them to set aside decisions than take decisions. In all of this sordid affair, the ultimate loser has been PNSC and the people of Pakistan. The same is true for many other SOEs.
PNSC has been range bound in its profits with the only exception being the fiscal year 2021-22 as well as the current fiscal year where record profits were made and remains attributable to a historic surge in the freight market rates as well as the induction of four vessels at highly competitive pricing, with credit going to the Chairman and Board of Directors of the time who went out of their way to finalize the inductions.
Investment in SOEs
It has been recently reported in various sections of the press that some of Pakistan’s SOEs have been offered to UAE’s investment arms including Abu Dhabi Development Holding Company (ADO) and International Holdings Company (IHC). Both these entities typically have investment portfolios consisting of domestic UAE-based entities. Pakistan’s SOEs offered for investment include Oil and Gas Development Company Limited (OGDCL), Pakistan Petroleum Limited (PPL), National Bank of Pakistan (NBP), Pakistan International Airlines (PIA) and Pakistan National Shipping Corporation (PNSC).
UAE’s potential acquisition of government shares in the aforementioned SOEs could be a godsend for these companies and for the cash-deprived government. Should the foreign investors decide to perform their pre-purchase due diligence of these entities, then every possible assistance must be afforded by the federal government for meaningful and successful due diligence of each organization.
The offer for investment in the equity of these organizations must include the appointment of members to the Board of Directors along with management control with the full option to replace the Chairman/CEO and CFO with individuals from the investor’s own team or hire them specifically for the purpose. This shall give the investors enough management control over the entities to make necessary management changes in these organizations with a view to improving efficiencies and in turn profits and returns.
As foreign investment flows into the respective listed organizations, with better management practices, ideally everybody should benefit. The increased performance will yield increased profit with more taxes and dividends being contributed to the government’s kitty. Increased share prices of those entities will also see shareholders from the general public benefit from the investment thus boosting market capitalization.
With the federal government grappling with this latest bout of economic instability, this time replete with terrorism and flare-ups at our borders, it is evident that there seems to be a lack of long-term vision and direction, with SOEs being worse off as a result. Attempts at policy re-calibration are interspersed over the years only punctuated with untimely reversals. Instability is keeping this nation from progressing. Our neighbors have developed by leaps and bounds simply because they have stability and continuation of consistent policy.
Unless we take stock of what has gone wrong instead of simply brushing it under the carpet, with truth and reconciliation for all, it seems we will remain doomed to repeat history with no regard for what the future may bring.
Saleable SOEs should be divested by the government to attract much-needed foreign exchange and in turn, the private investors should be required to run the privatized organizations more efficiently than the government appointees. An opportunity for a win-win situation exists and the opportunity should be capitalized on.
The writer is an advisor to the Karachi Chamber of Commerce and Industry). He can be reached at firstname.lastname@example.org, captainanwarshah.blogspot.com