Can Profits be Turned from State Owned Enterprises?

Pakistan’s State Owned Enterprises’ (SOEs) contributed PKR4 trillion to total revenues in 2018-2019. The total asset value was 19 trillion. SOEs contribute roughly 10 per cent to the nominal GDP. Moreover, SOEs provide employment to more than 450,000 people. This is around 0.8 per cent of the total workforce.

Commercial SOEs collectively recorded PKR143 billion net losses for the year 2018-2019. Meanwhile, the estimated losses for the year 2017-2018 were around PKR287 billion. A slight improvement is recorded in the fiscal year 2018-2019. This data is driven from the Ministry of Finance’s report on SOEs.

Losses in SOEs

The performance of SOEs in the past six years shows that intermittently losses have been experienced by commercial SOEs. Furthermore, the sum of the losses of the top 10 loss-making state-owned entities contributes around 90 per cent to the total losses of SOEs portfolio each year. Pakistan Railways, National Highway Authority, Peshawar Electric Supply Company, and Pakistan International Airlines (PIA) are among the top 10 loss makings SOEs.

The problem of losses occurs due to the over-regulatory policies of the government. The government attempts to control the SOEs through political interventions, parliamentary oversight and ministerial supervision. This has created various problems of mismanagement in the governing structure of SOEs. As a result, SOEs have declined their revenues and are affected with billions of losses.

In the policy framework of Pakistan donor influence plays a very vital role. Under the influence of the International Monetary Fund Pakistan has experienced various privatization programs since 1991. None of the objectives of these programs have been achieved till date, despite some incomplete privatization in some sector.

The reason behind the failure is a lack of transparency, irregularities, and corruption in the privatization process. For vested interests some SOEs like Pakistan Steel Mills and PIA have been privatized. These didn’t perform well.

Mixed Ownership Approach

To learn from the literature and the study of  Wang et al. (2021), Pakistan can adopt the mixed ownership approach in SOEs. This will address several issues. The mixed ownership approach has transformed Chinese SOEs.

What is the mixed ownership approach? The government owns the assets, while managerial autonomy is given to the private sector. In Pakistan, SOEs are performing disappointingly and the entire sector is contributing billions of losses because of the government’s over regulatory policies, and bureaucratic and political interventions.

Guan et al. (2021) explained that in the 3rd plenary session, the 18th Communist Party of China put forward a decision on mixed ownership reforms. The purpose is to create a multiple supervision and governance mechanism. Interest in the mixed ownership approach is increasing and the literature has highlighted that non-financial enterprises are increasing their financial transactions and investments in financial assets (Stockhammer and Grafl 2010). Their profits are increasingly obtained through financial channels (Krippner, 2005).

To understand mixed ownership reforms two questions should be considered: What are mixed ownership reforms? And why should mixed ownership reforms be addressed in Pakistan?

Mixed ownership refers to an ownership structure that is derived from multiple sources of equity capital and forms of equity cooperation. This includes the state, an individual or family, a legal-person financial institution, an employee, and/or a foreign ownership (Dong et al., 2014).

Secondly, mixed ownership reform either mitigates the agent conflicts or avoids the loss of state assets (Liu et al., 2018). These questions have been answered in the literature in the context of China and we can learn from the literature to adopt this approach to reform Pakistan’s SOEs. This demonstrates that the Chinese mixed-ownership reform is different from the privatization programs of Western countries.

The Way Forward

In order to reform SOEs, the government needs to develop a committee to identify the reasons behind the failure of SOEs in Pakistan. Research and development can provide a way forward to government. The government can also collaborate with academia to provide good research on SOEs. This will help to overcome the losses and make enterprises employable and profit making.

Pakistan can adopt a Chinese model of mixed ownership. This was suggested in a webinar at Pakistan Institute of Development Economics. In this model, the government owns the asset of an enterprise and managerial autonomy is given to the private sector. Independent professionals will run the enterprise without political and bureaucratic interference.


Note: The article is originally published in The Friday Times, Naya Daur.