The burden of inefficiency

I was amazed to discover the profound lack of understanding surrounding the footprint and performance of state-owned enterprises (SOEs) in Pakistan upon joining the government. This glaring absence of data left us shrouded in uncertainty, blind to the intricate web of entities operating under federal oversight and the far-reaching implications they held for our economy.

The weight of the situation pressed heavily on my heart. In 2011, I embarked on a formidable journey, uniting a professional team within the government to unveil the extensive footprint of the SOEs. Our mission focused on investigating this complex landscape, uncovering a staggering total of approximately 200 SOEs, which included 85 commercial SOEs, 83 subsidiaries, and the remainder classified as non-commercial SOEs.

The commercial entities, which are the focus of this discussion, span eight distinct sectors: Oil and Gas, Power, Financial Services, Transport, Infrastructure, Information and Communication Technology, Manufacturing, Mining & Engineering, and Industrial Estate Development, Trading & Marketing and miscellaneous. The sheer scale of this footprint has remained unchanged since our initial report in 2014 – a testament to both the opportunities that lie ahead and the burden we confront as a nation.

Over the decade from 2014 to 2023, Pakistan’s top 23 loss-making commercial SOEs — including the beleaguered Pakistan International Airlines (PIA), the energy sector's distribution and generation companies (DISCOs & GENCOs), Pakistan Steel Mills, Pakistan Post Office, and the National Highway Authority (NHA) — have accumulated an astonishing loss of Rs5,595 billion. To put that into perspective, this equates to an eye-watering $20 billion in losses.

Imagine the weight of this figure: a colossal burden on our nation’s economy that reverberates through the corridors of power. Each rupee lost signifies not just financial mismanagement but also unfulfilled potential — missed opportunities for growth, innovation, and services that could have uplifted countless lives.

Sectoral analyses of SOEs divulge a stark reality: while the infrastructure, power, transport, and information and communication technology sectors are hemorrhaging resources, only the oil and gas sector, along with the National Bank of Pakistan, contributes positively to the overall profits of SOEs.

Delving deeper uncovers staggering accumulated losses among eight state-run distribution DISCOs from 2014 to 2023, reaching an alarming Rs2,382 billion ($8.5 billion). 

The four GENCOs are equally distressed, adding another Rs138 billion in losses over the decade. 

These figures resonate as a profound indictment of inefficiency and mismanagement that has long plagued our power sector. As DISCOs and GENCOs struggle to provide reliable electricity, they have become entangled in a vicious cycle of debt and inefficiency, further burdening our national economy.

PIA has grappled with interference, indecision, high operational costs, reduced passenger volumes, and operational inefficiencies that have culminated in Rs712 billion in losses over ten years. These substantial losses and negative equity of near Rs502 billion in 2023 necessitated immediate action; yet to date, we have been unable to stem the bleeding.

The NHA presents another tale of acute financial distress with accumulated losses of Rs1,552 billion over ten years and an outstanding loan portfolio of Rs3,100 billion. Similarly, Pakistan Railways has amassed Rs390 billion in losses over ten years due to weak business planning and untenable pension liabilities.

Between fiscal years 2016 and 2023 alone, cumulative fiscal support extended to these SOEs — including equity injections, subsidies, grants and foreign and domestic loans — reached an astounding Rs5.7 trillion. This figure represents an average of approximately 1.4% of GDP during this period. Such dependency encapsulates systemic inefficiency that drains our national resources and stifles economic potential.

The untenable nature of this reliance — coupled with a weak quality of goods and services provided by numerous SOEs — renders transformational change in the way we deal with SOEs. We must act on the spectrum of options: restructuring to enhance efficiency, privatising most of the entities, exploring leasing arrangements, divesting shares through the capital markets and liquidation as viable paths forward.

Our rigorous examination of SOEs — through extensive data review and interactions with management in the ensuing years after 10 years — revealed a troubling reality: these entities were deeply marred by official meddling, weak appointments at C suite level, inefficient operations, overstaffing issues, and spiraling debt. 

Many SOEs thus survived not through merit but through a web of preferential policies: tariff protections, special access to credit, government guarantees, tax exemptions, and generous subsidies.

We had recognised back in 2011 that attempts at corporate governance reform were limited in both extent and coverage. I was fortunate enough to must stakeholder support on the urgent need for change; thus, beginning a significant task of crafting the Public Sector Companies Corporate Governance Rules — a vital effort completed in 2013.

This initiative was not merely procedural; it represented a major leap forward. The rules advocated for independent directors’ inclusion and comprehensive business plans alongside critical compliance measures aimed at elevating governance standards within these enterprises. 

In 2019 these rules were further amended to reinforce the government’s commitment to accountability. More recently, we witness the passage of the SOE Act 2023 – a comprehensive framework for SOE operations.

The SOE footprint report alongside the Corporate Governance Rules and SOE Act and SOE Policy signify progress towards improving corporate governance; however, effective enforcement remains lacking. Suggestions have been put forward for authorities to implement hard budget constraints as well.

The NHA and Pakistan Railways both do not seem suitable for divestment at present. Authorities need to appoint experts to oversee their meaningful restructuring. However, divestment remains a logical option for most other commercial SOEs operating in sectors that can be effectively managed by the private sector.

The privatisation saga in Pakistan, initially envisioned as a transformative journey towards economic revitalization, has instead unfolded as a narrative fraught with profound challenges. The dual collapse of PIA’s privatisation process within a decade, alongside nearly $20 million spent on consultancy fees, serves as poignant testimony to the intricate difficulties inherent in divesting SOEs.

It highlights the necessity for building a professional privatisation commission dedicated to strategic planning, efficient implementation, regulatory oversight and public trust while addressing underlying issues within SOEs. 

The Pakistan Post Office and Pakistan Broadcasting Corporation have accumulated losses of Rs78 billion and Rs32 billion respectively and may be ideal candidates for liquidation.

Authorities must frame SOE reform within broader contexts aimed at cultivating well-regulated competitive markets, while further enhancing corporate governance frameworks. 

At the heart of this reform endeavour lies an essential truth: beyond establishing a professional operational framework, the success of these reforms hinges on robust political buy-in coupled with meaningful public engagement. Citizens are not mere bystanders; they are the rightful owners of the assets which authorities seek to manage on their behalf — a crucial truth we must confront unwaveringly.

The break in the cloud in this narrative is that we have built a substantial body of work within the government, enabling us to make informed decisions regarding the SOE saga. It is a heart-rending truth that we have been advocating for these insights since we embarked on this journey in 2011. 

The urgency of our recommendations has often been met with hesitation, leaving us to grapple with the stark contrast between potential solutions and the slow march of progress.

Disclaimer: The viewpoints expressed in this piece are the writer's own and don't necessarily reflect Geo.tv's editorial policy.

The writer is a former adviser, Ministry of Finance. He tweets @KhaqanNajeeb and can be reached at: [email protected]

Originally published in The News