HomeNewsLoss-making SOEs must be privatized - Opinion

Loss-making SOEs must be privatized – Opinion

The SOEs are required to be privatised. This compulsion is driven by no other reason than that going forward, no money will be available to continue financing their losses that have accumulated to Rs2.5 trillion (equivalent to $8.8 billion).

PIA alone has accumulated losses of over Rs600 billion, growing at an average rate of Rs 150 billion per annum, with outstanding debt and liabilities of more than Rs350 billion, even after having received several bailout packages from the government.

Apart from that, the airline has become a source of shame for the nation. It has been denied the right to land in the USA, Europe, the UK and many other destinations of value because of the controversy over the credibility of flying license of its pilots.

Lately, instances have surfaced where the PIA aircraft have been detained at foreign airports on account of non-payment of bills for the services rendered on ground and only after settlement of payments have they been allowed to fly out.

Another example of subsidy guzzlers is Pakistan Steel Mills (PSM), which for years has been surviving on government dole. Yet, government after government did not get rid of them, nor restructure them and continued to provide them subsidy despite being cash-strapped and surviving on borrowed money. The current $3billion IMF Stand-by Arrangement (SBA) with stringent conditions has put a stop to these subsidies.

The government on its own cannot sustain the SOEs. The government’s fiscal position is vulnerable with the fall in revenue generation on account of economic slowdown. State borrowing has reached a level that threatens the banking system of the country. With no money available, most of these SOEs would need to be wound up because they can neither be repaired, nor restructured, nor privatised as ‘going concerns’.

Reducing losses and improving the financial viability of State-Owned Enterprises (SOEs), a new World Bank report has suggested to the government to reduce or eliminate the longstanding practice of covering SOEs operating losses with transfers from the budget.

With the government’s direct financial support to the 14 largest loss-making SOEs at 0.8 per cent of the GDP and support to all SOEs reaching 1.4pc of GDP in the fiscal year 2021, the government should subject all requests for financing by SOEs to a more stringent review process, including submission of independently audited financial statements and credible business plans to reduce losses.

For the nation the privatisation of SOEs offers a silver lining. The earlier privatisation of banks and telecom sector are country’s success stories, which did much good to the fiscal health of the state and for the people.

In both the sectors the losses under the state control moved to profit in few years after privatisation. From an after-tax loss of Rs9.77 billion in 2001, when they were owned by the government, these privatised banks’ earnings rose to a profit-after-tax of Rs73.115 billion in 2007.

Higher earnings led to increased tax payment by banks to the government — rising from Rs10.8bn in 2001 to Rs33.8bn in 2007. It is also instructive that in 2008 and 2009 the average loan write-off per borrower in public-sector banks was over twice of private banks. And even better results were witnessed in the telecom sector.

Privatisation or winding up options of these entities would, most likely, be challenged by the employees of these entities and politicians who have been major contributors to this deplorable state of affairs.

The vociferous opposition to privatisation by bureaucrats and politicians appears to be on its last leg. It has managed to frustrate privatization for far too long with much damage to the country’s fiscal discipline. There is now only one option: “Clear the decks and off with the SOEs”.

Copyright Business Recorder, 2023

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