A Case for State-Owned Enterprises in Pakistan

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A Case for State-Owned Enterprises in Pakistan

Pakistan is facing a formidable economic challenge. The country’s trade deficit has soared to $48.66 billion. The mighty dollar went from PKR166.8 to PKR238.5 in just six months. Inflation is over 40 percent – making an all-time-high record. Long queues of people to buy subsidized flour and sugar are being witnessed daily. Unemployment is crushing the hopes of the youth. Since the government is already running a budgetary deficit of PKR5.5 trillion, it has decided to transfer the burden to the middle class by increasing taxes and reducing subsidies. All looks doom and gloom. The country is desperately looking for a panacea that can help increase exports, achieve socioeconomic stability and raise government revenues. That solution can be State-owned enterprises.
State-Owned Enterprises (often referred to as SOEs) are government-owned corporations. The purpose of an SOE is to generate profit, manage natural resources and control the strategic resources of a country. Some of the largest companies in the world are state-owned; for example, Saudi Aramco, which is the world’s most profitable company, is owned by Saudi government. In the USA, Federal National Mortgage Association is a government-owned company. China’s 12 largest companies are all state-owned.
Public sector has played a vital role in the rise of China. After the Communist victory on the mainland, the biggest challenge was the industrialization of a country which was predominantly an agrarian state. China was left behind by the West after the Industrial Revolution in the 18th century. However, the SOEs helped the Communist Party to develop an industrial base in the country. After Deng Xiaoping’s reforms in 1978, the role of SOEs got transformed. Under the new policy, many sectors of the Chinese economy, e.g. manufacturing, mining, construction, were left to the SOEs. They were also important in uplifting millions out of poverty because they were willing to invest in remote regions. As many as 91 SOEs from China are on Forbes’ Fortune 500 list. Today, China is the world’s second largest economy with the largest foreign reserves, and SOEs have a major role in it.
In Pakistan, however, the ongoing discussion is about privatizing of loss-making entities. The government should know that privatization would only loosen its grip over the economy, and it would leave it only with the option of taxation for revenue collection, a measure about which Winston Churchill, the legendary British statesman, rightly said: “I contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself by the handle.” Besides, many European countries have a long history of running SOEs. Volkswagen, a popular German car brand, was started as an SOE. It has been proven in Europe that SOEs outperform private enterprises in times of crisis. Thus, state-owned enterprises are an asset.
Pakistan can learn from the world. Government-owned companies can generate profits for the government. Moreover, they can export goods and earn valuable foreign exchange. They have the potential to solve the dual crisis, i.e. stagflation and trade deficit. To achieve this, a two-pronged strategy is required. One side is about the enlargement of the government’s involvement in key sectors through the creation of new companies. The second side is the reforms in existing public sector companies. Both these sides are discussed below.
The government should explore new avenues for investment. In this regard, the principle should be to break private monopolies over natural resources, alleviate the lack of investment in advanced sectors, and control strategic resources.
Monopolies, cartels and mafias are bad for an economy. Sugar is a prime example. Pakistan faces almost every year a shortage of sugar. A large organization with a mandate to produce sugar from sugarcane can solve this issue. It will break the monopoly of sugar manufacturers, and end the practice of price manipulation through hoarding.
High-end manufacturing like semiconductor chip-making is an example of an area where investment is insufficient. It is the future of the industry. Semiconductor chips are used in almost every electronic product and gadget. With the rise of artificial intelligence, the demand for these chips would rise even higher. Currently, Taiwan is the leader in this industry because of its State-owned enterprise. Pakistan can replicate Taiwan in this domain.
Pakistan should take full control of its natural resources. Thar’s coal, Balochistan’s copper and gold and Gwadar port are given to local and foreign investors. These are strategic resources that are handed over to Engro, Tethyan Copper Company, and Chinese Overseas Ports Holding Company, respectively. Private companies cannot be trusted with strategic resources. The cases of Ghana, Nigeria and Kenya are warning signs for other developing nations. Despite being rich in oil, rubber, and diamonds, the countries still are under-developed. The reason is that these resources are mined by private companies to maximize their profit. They take all the profit while the government is left with almost nothing. Pakistan should learn from Saudi Arabia, UAE and Iran. These countries have large public sector companies for their oil reserves. The oil profit directly goes into the national exchequer.
It is worth noting that, in Pakistan many state-owned companies already exist, e.g. Pakistan Railways, OGDCL, NBP, ZTBL, WAPDA, Pakistan steel, PSO, and PIA. Instead of generating revenues and increasing exports, these companies are a burden to the national treasury. National Highway Authority (NHA) posted a loss of around 170 million rupees in FY 2019. QESCO faced a loss of almost 37 million rupees. These loss-making entities should be converted into profiting making. For this, the following measures can be taken.
Firstly, these companies should be liberated from political interference. Politicians use jobs in the public sector to appease the voter base. Moreover, CEOs are appointed on the basis of party loyalty. China uses a commission to oversee all the state-owned enterprises. The commission is responsible to the National People’s Congress (the legislative body of China), and the chairman is also elected by Congress. Pakistan should replicate this model. Parliamentary oversight through a commission would decrease political interference. Moreover, the commission comprises technical experts which increases efficiency.
Secondly, public sector companies should be subject to national audits. It will counter corruption in state-owned enterprises. The Auditor General of Pakistan is a constitutional institution that can carry out the task.
Thirdly, Pakistan should create a bridge between universities and SOEs. Students in universities should be tasked with research and development. Real-life issues faced by SOEs can be solved by researchers in universities. It will not only help in the upgradation of SOEs but will also enhance the practical knowledge of students.
SOEs have been a success in China and Europe. China’s rise is attributed to the success of its SOEs. Many projects of China-Pakistan Economic Corridor are handled by Chinese SOEs. Chinese Overseas Ports Holding Authority has taken over Gwadar. In Europe, there are also many examples of successful government-owned companies. Volkswagen is one of them. The research at Ghent University shows that SOEs outperform private companies in a crisis. They can also help Pakistan to overcome the economic crisis. Therefore, the government should form new SOEs. High-end manufacturing is an area where the private sector is not willing to invest. The government can fill this gap. Furthermore, public companies working on strategic resources will grant extra control to them. The state also cannot forget the existing SOEs. They are posting losses after losses despite the successes of their counterparts in China. The government should liberate them from political manipulation, and devise a national audit program to fight corruption. Consequently, the government should not privatize public-owned companies; instead it should create new ones and reform the existing ones.

The writer is a mechanical engineer, also having an MA degree in political science

Muhammad Ali Asghar

This is the Admin of this website

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