UNCONVINCING chants for the privatisation of bleeding SOEs are being raised in Islamabad. Presently, there are approximately 215 of them, of which 170 are commercial entities (with 475,000 employees), which have rarely achieved a five per cent return on their assets in three consecutive years.

Between FY2013-14 and 2018-19, the top 10 loss-making SOEs accumulated losses of more than Rs2.1 trillion, with the government having provided them Rs2.5tr between 2018 and 2021, including a subsidy of Rs1tr.

As an ardent supporter of a more deregulated, open, market-based economy, one regards privatisation as just one of the instruments in this direction. However, as argued earlier, the majority of these SOEs would have to be liquidated or wound up, not being marketable on an ‘as is, running concern’ basis.

One such example is that of PIA, which is being offered as the first candidate for privatisation, and which, the privatisation minister informs us, has an accumulated loss of Rs713 billion (growing in excess of Rs150bn per annum), having lost $7.1bn since 2012.

It has only 19 aircraft operational (compared to Air Blue’s 12), 15 of these are leased (six of which are grounded), costing $5 million per month. And the value of its assets is not enough to discharge its liabilities.

The reported decision of the government partially recognises that PIA as structured today cannot be privatised as one entity, and that its non-core functions and assets will have to be hived off and its debt liabilities of close to Rs300bn will need to be taken over by the government (mostly covered by government guarantees) and parked in another corporate body. The core assets identified for sale are routes, landing rights, core engineering services and air service agreements.

In my opinion, there is need for greater clarity on what we consider as assets that are being sold, our expectation of their value as against their actual market value, and what the buyer would perceive or regard as the remaining liabilities they would be required to pick up.

There is need for greater clarity on what we consider as assets that are being sold.

The most prized asset(s) would be routes, landing rights/slots in major international airports and the respective time slot ‘owned’ by PIA. The only publicly available information is the 2016 sale by Kenyan Airways of its morning slot in Heathrow for roughly $75m. What would be the likely value of PIA’s slots today — higher or lower?

What would be the real value for the buyer of the 19 aircraft owned by PIA, considering their age and flight worthiness? As for the leased aircraft, the buyer is unlikely to either induct all of them into the fleet (by signing off on the leasing agreements) or to take over their outstanding liabilities. The government would be advised to settle with the lessors out of court. Any attempt at arbitration is likely to turn out to be rather costly.

As for properties owned or rented by PIA, it is not that obvious why the buyer would, for reasons of efficiency, retain all of them for its operations. Many of the owned properties would then eventually be up for sale. Furthermore, many of its offices globally, being superfluous for its functional needs, would likely be closed.

A key question that may have to factored into the sale agreement would be the future (and frequency) of flights to, say, Gwadar, Sui, Rahim Yar Khan, Sukkur, Skardu, Gilgit, etc — destinations to which private airlines are not flying currently.

With the public sector PIA not flying to these terminals, would the private sector take over these routes immediately or would there be a need for, say, a two-year slack subsidy, the budgetary burden of which could be lessened/adjusted against the transfer of rights for Haj flights to the new buyer?

The buyer would then examine the cost of other liabilities, those pertaining to the bloated workforce. Data is not available on the number of employees tied to PIA’s core functions — their numbers in excess of requirement for operations (the number of ‘ghost employees’ is anyone’s guess), their skill set and pension liabilities.

The buyer would expect pension liabilities of retired employees and the entitlement to date of the present to be picked up by the government. It is not clear how much of the existing workforce they would be prepared to retain, while being asked to pick up the golden handshake tag for the ones they decide to lay off, in which case they would obviously discount the offer price accordingly.

It remains to be seen if foreign investors would be interested in this transaction, given the country’s image owing to the security, political, economic and regulatory environment in comparison with other options globally. And, what tax and other concessions would they seek?

To this end, we would have to be mindful of the dividend outflows in foreign exchange, with the resulting impact on the current account and its financing.

PIA’s proposed divestment can tick all the boxes for the following, generally accepted, principles of privatisation if the transaction is also carried out in an open and transparent manner, with adequate preparation and time to get the best price for the public asset:

a) The transfer should improve the efficiency, cost-effectiveness and service delivery of the entity being sold.

b) It should improve market competitiveness in general, and in the sector in particular. Considering the number of private airlines already in operation, the sale of PIA’s core functions and assets should make the market more competitive.

c) Divestment should not result in the transfer of wealth to the buyer and the outcome should be in the public interest.

Finally, since money is fungible, the receipts from this transaction should not serve as a source for financing unproductive government activities and poorly designed, leakage-prone mega infrastructure projects, generating low returns and with limited positive externalities, since it is likely to slacken the effort for much-needed fiscal reforms.

Our laws also require that privatisation receipts be utilised to retire debt and not finance expenditures.

The writer is a former governor of the State Bank.

Published in Dawn, October 28th, 2023