Wednesday, January 12, 2011

Financial hemorrhage goes unabated

State-owned enterprises (SOEs) are among the serious and chronic ailments of Pakistan’s wobbling economy. They are responsible for hemorrhaging around $3 billion in the fiscal year 2010. The amount is two-thirds of annual defense budget and double the promised annual Kerry-Lugar-Berman assistance to Pakistan. SOEs are the major drain on Pakistan’s budget and devour public resources without any remorse and compunction. The corporate behemoths in the form of SOEs have been maintained by successive governments to fulfill their own political agendas. Governments have bald-facedly resorted to granting excessive and out-of-merit employment at all levels, causing acute inefficiencies, terrible public service, and deep-rooted corruption.

Even if at some places there are honest people whelming the affairs, by virtue of their training and background, they cannot run enterprises like business managers. They lack business acumen and will be shy to take pure investment decisions like entrepreneurs or professional business executives. Their promotions or reward system is not linked with business performance. They might be competent in matters related to administration but political appointments and politicized unions are what they have to constantly manage instead of applying their minds to making the organization commercially viable.

Staffing of SOEs is a highly politicized matter. Last year the government passed a bill to reinstate hundreds of thousands of employees, who were let go by the earlier governments, with retrospective benefits. There is no provision for investigating whether those reinstated employees are already employed somewhere else or established their own business. As a consequence, they will reap the windfall benefits at the cost of others who are deprived of jobs or entrepreneurship opportunities. Regrettably, SOEs that are publicly listed and therefore partly owned by individuals, companies, and mutual funds had no say in this bill even though under the Code of Corporate Governance such decisions are to be made by the board of directors. Instead, the costly employee reinstatement decision was made by a direct intervention from the majority shareholder – the government. This law will no doubt be a cause of further financial hemorrhage to the SOEs and make them crippled in the long term.

Thus, privatization in a transparent and open manner is the only way to unlock and unleash the pent-up productive potential of the nation’s resources and add significant value to those assets. Since the early 1990s, governments have pursued a significant privatization programs but unfortunately the process has come to a screeching halt since 2008. Due to Pakistan’s poor image worldwide, foreign investors are shy of investing in the country. Therefore, the government should use the secondary offering of already listed companies in order to generate much needed funds to reduce state borrowing and curb inflation. With the recent appointment of Chairman and Commissioners, the Securities and Exchange Commission of Pakistan should also be given the governmental mandate to introduce a Code of Corporate Governance for SOEs. The appointment of competent boards of directors and professional management will enable these SOEs to function more efficiently and thereby pave the way for their privatization.

Subsidies given to SOEs discourage the potential of the private sector. In contrast, competition in the private sector minimizes inefficiencies. One example of how privatization can help increase productivity and benefit consumers is the transformation of Pakistan’s telecommunication sector. The state of affairs in that sector was dismal until the privatization of PTCL (Pakistan Telecommunication Company Ltd) and granting of licenses to new mobile companies. The spirit of private enterprise has truly revolutionized the way the nation now engages in communication. Ten years back it was unimaginable that one day we will make a transatlantic call just for two rupees! That is the fruit of privatization.

Pakistan has no other option than to create a productive economy that generates sustained economic growth. For one, the recent rollback of oil price hike under political pressure will exacerbate the economic woes of the government. Similarly, the implementation of the Reformed General Sales Tax (RGST) has been postponed until September due to political pressure but will once again surface when the Finance Ministry finalizes its negotiations with IMF on extending the country’s loan where tax reform is one of the conditions. Now that the government gained some breathing space from political pressures, in the next six months it must deliver on implementation of the effective measures for anti-corruption and improving transparency, reducing the size of cabinet and its expenditures, and introducing the Code of Corporate Governance for SOEs. This will restore the image and confidence of economic managers who then will be able to gain support of parliamentarians for tough economic policy decisions – and the media will also have success stories to report.

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