International Financial Institutions (IFIs) persistently prescribe privatization as a panacea for developing countries including Pakistan. But economic reforms and privatization are scary terms in Pakistan.
It is worth noting that, while privatization in Pakistan has faced challenges and setbacks, there have also been instances where it has been successful, particularly in sectors like telecommunications and banking. The success of privatization depends on various factors including the government’s commitment to reform and the state’s ability to manage political and social resistance to privatization effectively.
Many state-owned enterprises (SOEs) have been established in Pakistan over the decades. These SOEs include corporations, autonomous bodies, companies, authorities, funds and trusts. These entities are of several types; they are registered as companies with the Securities and Exchange Commission of Pakistan (SECP), established through special enactments, and registered as trusts, funds and foundations to undertake functions that were not deemed to be the routine business of the federal government to be executed through its ministries and attached departments. Several subsidiaries were incorporated, thereby further expanding the size of the SOE portfolio in the country.
According to the report ‘State-Owned Enterprises Triage: Reforms & Way Forwards’ published by the finance division back in 2021, there are around 212 SOEs incorporated by the federal government including subsidiaries, trusts, and funds. Another consolidated report titled ‘Federal Footprint, State Owned Enterprises’ published by the finance division back in December 2023 reveals that out of 88 commercially operated SOEs, 71 are registered under the Companies Act 2017.
The report further indicates that 44 non-commercial SOEs (not-for-profit entities as well as trusts, universities, training institutions and welfare funds), and 83 subsidiaries of the commercial SOEs are mainly not-for-profit social-sector development entities.
The 88 commercial SOEs have a total asset base of Rs30.5 trillion and generated a sum of Rs10.4 trillion in FY2022. These 88 SOEs employed 349,573 people. These SOEs collectively incurred a net loss of Rs162 billion. The federal government provided them with financial aid worth Rs179 billion in FY2022 to keep them afloat. The top 10 loss-making entities caused a total depletion of Rs650 billion in 2022.
SOEs in Pakistan have a significant market presence, particularly in key service sectors like power generation and distribution, energy, aviation, and railways sectors. The 85 commercial SOEs mainly operate in seven sectors including power, oil and gas, infrastructure transport and communication, manufacturing, mining and engineering, finance, industrial estate development and management, and wholesale, retail and marketing.
The financial position of various SOEs deteriorated over time resulting in a significant fiscal burden for the federal government in addition to poor service delivery to end users. There are multiple reasons including a number of administrative, management and policy issues which led to the poor performance of SOEs.
The emergence of market-based solutions for efficient service delivery along with the evolution of institutional arrangements like regulatory frameworks necessitated the regular review of SOEs to ascertain their rationale or suitability for continued retention under government ownership and control. However, such a review process remained slow and driven by exigencies instead of taking a holistic and continuous course.
The report says that more than 98 per cent of the government’s assets and almost 100 per cent of the losses in the SOE portfolio are related to commercial SOEs. The operational performance of commercial SOEs has a direct bearing on fiscal risks and fiscal deficits of the federal government.
Non-commercial SOEs are either largely self-sustaining entities or established to achieve a social objective which falls within the social policy objectives of the government which otherwise the private sector is unable to perform.
The National Highway Authority has been the major loss-making entity for several years; it has been excluded from the triage examination due to its unique nature of operations. The NHA’s losses mainly accrue due to its inability to generate revenues to service its loans. Furthermore, all regulatory bodies have been excluded from the triage examination like the Pakistan Telecommunication Authority, Pakistan Electronic Media Regulatory Authority, etc mainly because the regulatory functions are different from commercial operations and are primarily meant for the efficient functioning of imperfect markets.
The consolidated report further reveals that 31 state-owned commercial companies caused colossal losses of Rs730 billion in FY2022. The National Highway Authority is the leading loss-making SOE, which caused a loss of Rs168.5 billion, followed by the Peshawar Electric Supply Company which suffered a loss of Rs102 billion. PIA was the third-biggest loss-making entity, causing a loss of Rs. 97.5 billion to the national exchequer in 2022.
Privatization in Pakistan has faced several hurdles, including political opposition. Privatization efforts have often faced resistance from political parties, labour unions, and other stakeholders who fear job losses, reduced benefits, or loss of control over SOEs. Complex legal frameworks, bureaucratic hurdles, and unclear regulations further slow down or even halt privatization processes in the country.
Corruption within the privatization process potentially undermines public trust and confidence. Lack of transparency in decision-making, bidding processes and asset valuation leads to allegations of favouritism hindering successful privatization outcomes in the country.
Economic instability, market volatility, and investor uncertainty are other factors which deter potential buyers from participating in privatization processes. Weak investor confidence, particularly due to concerns about political stability, security risks, and macroeconomic challenges, can limit the success of privatization efforts. Critics argue that privatization may lead to increased costs, reduced accessibility, or decreased quality of essential services such as healthcare, education, and utilities, disproportionately affecting vulnerable populations.
The most important thing which hinders the process of privatization in Pakistan is the resistance from management and employees of SOEs. They resist privatization due to fears of job loss, changes in working conditions, or loss of influence and power. This resistance can manifest in strikes, protests, or sabotage, complicating the privatization process.
Addressing these hurdles requires a comprehensive approach that includes clear legal frameworks, transparent processes, stakeholder engagement, anti-corruption measures, and efforts to mitigate social and economic impacts.
Additionally, building investor confidence, promoting competitiveness, and improving governance are essential for successful privatization outcomes in Pakistan.
The writer has a PhD in Economics from PIDE and has 18 years ofexperience as an economic editor.
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