Privatization: A Path to Success or Another False Start?

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By: Qamar Bashir

Press Secretary to the President(Rtd)

Former Press Minister at Embassy of Pakistan to France

Former MD, SRBC

Since its inception, the new government has displayed a crucial optimism towards the prosperity and growth of the nation, characterized by an unparalleled determination labeled as “Iron determination” (Fouladi Azm) by the Prime Minister. Backed by the strength and support of the establishment, the unelected finance team is poised to make fundamentally critical and highly challenging decisions. These decisions, which even former dictators refrained from due to political ramifications, demonstrate a readiness to tackle obstacles that could deter progress.

The consistent backing from the establishment, which sustained the former coalition government led by Shahbaz Sharif and the interim government led by Anwar Kakar, has primed public sentiment to an extent where the time is now ripe to confront challenges head-on and progress without hesitation. These imminent decisions, projected to yield savings of PKR 6,828 billion per year, are poised to significantly benefit the nation.

The digitalization of FBR is projected to generate over Rs. 3000 billion annually by curbing pilferage and halting the distribution of illicit gains among tax officials. Currently, a predetermined portion of tax evasion, with 50% going to the taxpayer and their lawyer, while the remaining 50% is distributed from the lowest-ranking peon to the regional commissioner. This same ratio is observed within the sales tax and customs departments, from the bottom to the top echelons of the hierarchy.

The privatization of PIA, even if it doesn’t generate a single penny, could result in savings of over Rs. 800 billion in terms of debt and an annual subsidy of Rs. 294.5 billion allocated to sustain the inefficient, unprofessional, and sluggish airline. Likewise, privatization or outsourcing airports could save the national treasury approximately Rs. 21.4 billion annually.

The privatization of state-owned enterprises, despite potentially yielding no revenue from their sale, would result in significant savings for the state. With accumulated losses exceeding 500 billion, divesting these entities would save over Rs. 500 billion annually in subsidies and transfer the entities’ Rs. 1100 billion debt burden to the purchaser.

Similarly, privatizing the Distribution Companies (DISCOs) nationwide, even if they generate minimal proceeds from their sale, would yield substantial annual savings for the public. This includes Rs. 500 billion annually in electricity theft prevention and Rs. 639 billion in reduced line losses.

According to the Federal Footprint Consolidated SOE report for the fiscal years 2020-2022, published in December 2023, there are a total of 133 State-Owned Enterprises (SOEs), consisting of 88 commercially operated and 45 non-commercial entities. Remarkably, the commercial SOEs are making substantial contributions to the national economy through corporate taxes, dividend payments, and employment generation.

In the financial sector, which includes banks, insurance companies, Non-Banking Financing Companies (NBFCs), and Development Financial Institutions (DFIs), there has been significant growth and transformation since FY2022. The sector’s assets have surged to an impressive Rs. 8.9 trillion, indicating consistent growth over the past four fiscal years. Revenues have also seen a remarkable increase, reaching Rs. 614.648 billion, marking a 31% rise from the previous fiscal year. Additionally, net profits have soared to Rs. 72.569 billion, demonstrating a remarkable 46.5% year-on-year increase.

In the commercial sector, Infrastructure, Transport, and Communication (ITC) emerge as significant players, boasting an asset base of Rs. 7.983 trillion. Led by entities like the National Highway Authority and PIA, this sector experienced a notable 38% revenue growth. However, despite these gains, challenges persist, with PIA grappling with a substantial net loss of Rs. 294.500 billion. Nonetheless, subsectors such as Ports & Shipping and Communication show promise for sectoral recovery and efficiency improvements.

The Manufacturing, Mining, & Engineering sector showcased robust growth, with assets soaring by 49% to Rs. 904.515 billion. Notably resilient, this sector posted a significant net profit of Rs. 12.267 billion. Subsectors like Metals & Mining and Printing played pivotal roles in this transformation, contributing substantial profits and demonstrating operational stability. Such progress underscores the sector’s potential for sustained growth and profitability.

In the Oil and Gas sector, boasting assets worth Rs. 5.620 trillion, remarkable revenue expansion of 82% was witnessed, fueled by increased energy prices post-COVID. Despite challenges, SOEs in this sector exhibited operational excellence, exemplified by PARCO’s outstanding achievement of a 725% increase in net profit. However, the sector faces ongoing struggles in balancing revenue growth with operational efficiency, particularly in the Marketing & Distribution segment, which remains susceptible to market risks due to high leverage and narrow profit margins.

Even in the Power sector, substantial growth has been observed, with assets climbing to Rs. 6.480 trillion and revenue reaching Rs. 3,000 billion in FY2022. However, operational margins remain a concern, particularly for Electricity Distribution Companies (DISCOs). Strategies must be devised to enhance revenue collection and mitigate operational inefficiencies to address losses effectively.

The Estate Development and Management sector exhibited impressive growth, with assets rising by 38% to Rs. 36.7 billion. Strong revenue growth of 57% to Rs. 6.256 billion and a robust profit margin of 36.8% underscored the sector’s resilience and profitability, positioning it well for sustained success.

In contrast, the Trading and Marketing sector saw a 47% increase in assets to Rs. 446.119 billion, largely driven by agricultural storage. However, challenges in revenue and profitability persisted due to socio-economic obligations, such as subsidized essential food commodities, necessitating a delicate balance between commercial operations and broader strategic objectives.

Despite revenue growth in the Media and Entertainment sector, operational hurdles led to a net loss in FY2022. Entities like PTV sustained losses of Rs. 2.72 billion, while SRBC faced liabilities of Rs. 10 billion.

The commercial portfolio of SOEs plays a crucial role in driving economic activity, contributing over Rs. 430 billion through corporate taxes and dividends. However, from an accounting perspective, a net loss of Rs. 161.820 billion was recorded, primarily due to significant depreciation charges and increased finance costs associated with borrowing, despite the extensive asset size.

In contrast, the non-commercial portfolio of SOEs, comprising 45 entities, including 39 independent companies, displayed a more positive economic outlook. Total assets amounted to Rs. 224.762 billion, with total revenue generated during the year reaching Rs. 34.420 billion and net profits standing at Rs. 8.313 billion.

However, to remain competitive and sustainable in the long run whether SOEs are currency profit or loss making, they must continually enhance their capacity, efficiency, and human resource productivity. This involves establishing a robust framework for research and development, innovation, and product/service enhancement. Regular upgrades to infrastructure, machinery, and technology, including the integration of Artificial Intelligence, Internet of Things, big data analytics, and computing power, are essential to stay ahead.

My own experience at the helm of State-Owned Shalimar Recording and Broadcasting Corporation highlighted the challenges of bureaucratic hurdles and resistance from worker unions, hindering the perpetual upgrades necessary for competitiveness. In contrast, private sector TV channels, unencumbered by bureaucratic red tape, have outpaced public broadcasters in various sectors and disciplines.

Privatization is a strategic imperative, regardless of whether State-Owned Enterprises (SOEs) are currently profitable or operating at a loss. Unlocking their full potential through privatization can attract strategic investors, alleviate fiscal burdens, and foster market competition in today’s fiercely competitive environment.

Hence, the government should prioritize full-throttle privatization of all SOEs, irrespective of their profitability status. Profitable entities are attractive to investors due to their strong financial performance, market presence, and potential for returns. Conversely, privatizing loss-making enterprises presents an opportunity for restructuring, reallocation of resources, and reducing fiscal liabilities.

While some SOEs are vital for national interests, such as those related to infrastructure, national security, and social services, the decision to privatize should be carefully weighed based on economic considerations and long-term developmental implications.