Analysing Pakistan’s economy, the World Bank (WB) expects it to grow by only 0.4 percent in the current fiscal year ending June 30, due to a variety of factors, including impacts of devastating floods last year, depletion of foreign exchange resources resulting in high inflation, import controls and subdued industrial activity, and political instability. According to the “Pakistan Development Update Report April 2023” the WB recommends that Pakistan can sustain long-term growth by implementing fiscal and productivity enhancing reforms, agenda of which should include, inter alia, curtailing and improving the quality of public expenditures through reduced subsidy spending on various sectors including energy and agriculture, and on the State-Owned Enterprises (SOEs).
Analysing Pakistan’s economy, the World Bank (WB) expects it to grow by only 0.4 percent in the current fiscal year ending June 30, due to a variety of factors, including impacts of devastating floods last year, depletion of foreign exchange resources resulting in high inflation, import controls and subdued industrial activity, and political instability. According to the “Pakistan Development Update Report April 2023” the WB recommends that Pakistan can sustain long-term growth by implementing fiscal and productivity enhancing reforms, agenda of which should include, inter alia, curtailing and improving the quality of public expenditures through reduced subsidy spending on various sectors including energy and agriculture, and on the State-Owned Enterprises (SOEs).
Another World Bank report titled “Pakistan Federal Public Expenditure Review 2023” ranks Pakistan’s SOEs as the least profitable in the entire South Asia; their combined losses growing faster than assets, and the incremental resulting losses being significant annual drain on public resources. The accumulated losses of these SOEs amounted to 3.1 percent of GDP in 2020. On the other hand, these SOEs consume more than Rs 458 billion annually from public funds to maintain their existence as their combined loans and guarantees surged to 9.7 percent of GDP in 2021. Besides reducing expenditures for the SOEs, and strengthening SOE governance, there is a need to divest loss-making SOEs, according to the document.
The World Bank has therefore urged the government to introduce on priority strong reforms to reverse the trend. In the past too, the WB had presented a comprehensive policy paper on Pakistan titled “State-Owned Enterprise (SOE) Reform: Time for Serious Corporate Governance” in November 2012 emphasizing to adopt urgent policy measures to improve efficiency and effectiveness of the SOEs. But sadly, the successive governments remained insensitive to critical issues and the SOE reforms were stalled. Interestingly, the Asian Development Bank (ADB) in its “2023 Annual Evaluation Review” has observed that its public sector projects in the South Asia region performed inefficiently during 2016-2022 primarily due to weak management and poor financial capacities of the executing and implementing agencies in the country.
Currently there are some 80 federal SOEs engaged in commercial activities, whereas 20 out of these SOEs are identified for privatization and divestment under the ongoing privatization program. These 20 SOEs, which are either non-profitable or loss-making entities or non-going concerns having ceased operations since long, belong to energy, industrial and financial sectors and real estate. Progress on privatization and divestment of these SOEs has been sluggish, and only a couple of real estate entities have been sold out in spite of a lapse of two decades or so. The situation has adversely impacted the performance of energy and industry sectors in particular, adding to the economic predicament the country faces today.
The SOEs to be divested in the industrial sector are Heavy Electrical Complex, Hattar (HEC), Pakistan Steel Mills Corporation, Karachi (Pakistan Steel), Sindh Engineering (Pvt) Ltd, Karachi (SEL) and Pakistan Engineering Co Ltd, Lahore (PECO). After five failed attempts over the years to sell HEC, manufacturer of power transformers, the government was finally successful in February 2022 to conclude a deal with an investor namely IMS Engineering (Pvt) Ltd for off-loading HEC’s 96.6 percent shares along management control at Rs 1.4 billion. However, the transaction has not yet been completed as there were issues related to transfer of land and mark-up payments on HEC loans that were not settled by the government earlier. The last bottleneck of mark-up payments on loans was cleared and approved by the Economic Coordination Committee (ECC) of the Cabinet in January 2023, but somehow HEC has not been handed over to the party resulting in its inefficient operations besides financial loss to the government.
Sindh Engineering, an automobile assembly plant, has been non-operative for decades, and efforts to have partnership with a foreign car manufacturer for progressive manufacturing of automobiles locally could not materialize in the past. The factory is closed for a long time and has hardly two or three employees. It has not been sold due to many “inherent issues” faced by the company, according to the Privatization Commission that has not stated the issues. Similar is the case with off-loading the remaining shares of PECO, manufacturer of a variety of engineering goods. PECO, a company listed on the stock exchanges, is closed due to heavy mismanagement, large-scale corruption and huge financial liabilities, and seemingly there is no likelihood of resolving its “inherent issues” in near future.
Pakistan Steel, which is completely shut-down since June 2015, grossly reflects the apathetic attitude of the successive governments towards its revival or privatization. Since then, the government repeatedly claimed to revive soonest steel production at the largest industrial complex of strategic importance either through injection of additional equity and acquisition of modern technology or by transferring its controlling shares and management to foreign investors but without any concrete results so far. The renewed effort was made by the Privatization Commission in October 2021 to invite foreign and domestic investors for “revival of Pakistan Steel Mills for acquisition of 51-74 percent issued share capital together with management control”. According to the approved transaction features the identified core operating assets of Pakistan Steel have been transferred to the new subsidiary Steel Corp (Pvt) Ltd for the divestment of equity stakes to successful bidder. In response, six international investors submitted their Statements of Qualification (SOQs) in January 2022. Subsequently, some of these companies have done, in September 2022, due diligence to assess the condition of installed plant machinery. Reportedly, the four Chinese qualified companies have formed a consortium to take over Steel Corp (Pvt) Ltd while other qualified bidders have backed out. There is no further progress however.
According to the Auditors’ Report dated April 5, 2023, Pakistan Steel has accumulated losses of over Rs206 billion as of June 30, 2022, and its current liabilities exceed the current assets by about Rs196 million. Ironically, there are still 2,607 employees at the mill which has been closed for the last eight years, having achieved zero production capacity during this period. Yet, amusingly, the Auditors have prepared financial statements of the company for the year 2021-22 on the basis of a growing concern against all financial standards and norms.
The writer is retired Chairman of the State Engineering Corporation
