FeaturedNationalVOLUME 18 ISSUE # 49

The imperative of privatising ailing state-owned enterprises

In Pakistan, a stark reality has persisted through successive governments – the failure to enact crucial reforms effectively. This has notably extended to the state’s ownership and management of ailing entities like Pakistan International Airlines (PIA). PIA’s long-standing struggles with mismanagement and financial losses have prompted calls for privatisation. In this context, we delve into the pressing need for privatisation, its history, and the economic implications. The ongoing debate on this issue underscores a crucial juncture in Pakistan’s economic development.

The harsh reality is that successive governments have consistently fallen short in executing vital reforms effectively. This pattern reflects a fundamental problem – no reform initiatives have ever gained a solid footing. Consequently, doubts have emerged regarding the determination, competence, and capacity of state institutions, including the current government, to carry out reforms in a meaningful and efficient manner. This skepticism is evident through the recurring pattern of taking one step forward and two steps back when it comes to commitments regarding the privatization or corporatization of ailing state-owned entities (SOEs).

Recently, national newspapers have been awash with stories highlighting the dire state of these SOEs, underscoring the urgent need for their privatisation without further delay. However, not long after these reports, we learned about the reversal of the decision to provincialize Discos, the cancellation of the Pakistan Steel Mills bidding process, and the grounding of PIA flights.

It appears that a sense of perplexity reigns within the corridors of power, resulting in a lack of coherence in decision-making. This has given rise to speculation that the government’s plan for SOE reform has mysteriously disappeared. The adverse impact of political and economic uncertainties on stakeholder confidence in economic recovery efforts cannot be overstated. At times, a sudden shift in the state’s approach occurs. A new idea gains momentum, only to be abandoned due to internal or external factors or the whims of those in leadership positions, causing the entire system to shift direction. Reforms should not be introduced or executed in a haphazard manner. For instance, discussions about the PIA initially did not include privatisation, but it was later decided that privatisation was on the table, though the specific approach remains unclear. In the meantime, the airline’s financial mismanagement and other issues are compromising its operations. The latest development is that a significant number of flights, both domestic and international, have been canceled due to a fuel shortage. The situation at Pakistan Steel Mills, another struggling SOE, follows a similar erratic pattern.

The PIA is now in dire straits. The heavily indebted national carrier was compelled to cancel 14 domestic flights and delay four others because Pakistan State Oil refused to provide further fuel until past dues were settled. Passengers and planes were grounded as the airline’s management scrambled to negotiate more concessions with PSO, despite an already substantial overdraft. However, PSO, facing its liquidity crisis with receivables exceeding Rs755 billion, is losing patience. This situation no longer seems conducive to PIA’s continued operation, as the airline teeters on the edge of a precipice due to indecisiveness from top-level decision-makers regarding its future.

It’s been evident for some time now: Pakistan is grappling with mounting debt, and it can no longer afford to sustain failing entities like the PIA without incurring significant opportunity costs. The national airline is plagued by mismanagement, overstaffing, and a dismal reputation on both international and domestic fronts. Despite pouring vast sums into so-called ‘revitalisation’ plans, the airline’s performance has consistently disappointed. Instead of continuing to channel taxpayers’ money into this black hole, it’s high time to privatise it. While this move may face resistance from its numerous employees, many of whom owe their jobs to reckless public spending, the government must stand resolute in favor of privatisation. We cannot afford to squander the nation’s precious resources on failing ventures when ordinary citizens are struggling to make ends meet.

The privatization process initially generated optimism under the Special Investment Facilitation Council (SIFC). However, it failed to attract a sufficient number of potential buyers, leading to the decision to abandon the process. Back in 2006, the company was profitable, but its sell-off was halted by the Supreme Court, led by then Chief Justice of Pakistan, Justice Iftikhar Mohammad Chaudhry. Since then, the company has incurred consistent losses. In 2015, its operations came to a standstill, yet it continues to burden the national treasury. In the case of Discos (Distribution Companies), there were initial plans for privatisation and provincialization. Now, the proposed option is to entrust their operations to the private sector through long-term concessions while retaining federal ownership.

The government’s commitment to this option remains uncertain, and some believe that addressing macroeconomic imbalances and instability can be achieved by clamping down on smuggling and discouraging the open market trade of foreign currency, even as the official market remains congested with legitimate transactions. The national currency started appreciating against the US dollar at a rate of one rupee per day, prompting speculative exporters to engage in currency trading. This forced the State Bank of Pakistan (SBP) to intervene in the forward market to counter the trend.

It increasingly seems that we are still responding reactively, lacking a coherent strategy. Our good intentions are hampered by a lack of resolute action to address fundamental issues. In essence, the ongoing indecision only prolongs the suffering. Without a doubt, essential reforms are unavoidable. While governments may deceive some people for a while, eventually, the consequences catch up with them.

The dilemma surrounding Pakistan’s state-owned enterprises has reached a tipping point. The notion of privatising these entities, especially the PIA, is no longer a mere suggestion but an imperative. The financial burden they impose on the national treasury, coupled with their dismal performance, makes it clear that maintaining the status quo is unsustainable. While challenges and opposition are expected, the government’s commitment to privatization is essential for the nation’s economic well-being. Delaying necessary reforms only prolongs the agony. It is time to break free from the cycle of indecision and set the course for a more prosperous and sustainable future.