STATE-owned enterprises (SOEs) frequently dominated the news cycle throughout the year 2023, mostly for all the wrong reasons, with the bankrupt PIA and the defunct Pakistan Steel Mills (PSM) vying for space on the front pages of newspapers and prime-time television.

For its part, the caretaker government, which has been trying to privatise some public enterprises to meet the IMF bailout deal’s goals, selected a consortium led by Ernst & Young as financial adviser to push privatisation of the national flag carrier. However, plans to sell off the PSM, which ceased operations in 2015, hit a snag when two of the three Chinese investors interested in its acquisition pulled out of the process, forcing the authorities to take it off the privatisation list over transparency concerns.

The painfully slow ‘progress’ on privatisation plans for PIA and PSM underscores how challenging it has become to divest these loss-making enterprises. Even the plans to sell two LNG-based power plants, and outsource operations of three major airports to Gulf investors under a public-private partnership, have not moved forward.

Yet 2023 also saw the authorities making a little bit of headway in creating a legal and policy framework to “strengthen governance, transparency, and efficiency of public enterprises” as required under the IMF bailout deal: the SOEs (Governance and Operations) Act, 2023 was passed by parliament in February and the ownership and management policy approved in November as part of a broader reform to strengthen their corporate governance framework and limit fiscal risks stemming from their operations.

These two actions are crucial steps towards achieving the broader objectives of a triage reform process the government had initiated in 2020 to meet a structural benchmark for the extended fund facility (EFF) programme signed with the IMF in 2019. The exercise was meant to identify SOEs that should be privatised as opposed to those that could be restructured or retained or needed to be wound up.

While some progress, albeit painfully slow, has been made on the legal and policy front, a serious effort is yet to be initiated to achieve the goals of the triage exercise under which the government is required to retain only those SOEs that are determined to be strategic on the basis of significant security or social importance, or owning and managing strategic assets that could not be entrusted to only private ownership.

The objective is to reduce the size of SOEs in the public sector as well as to make those which remain in the public sector become more competitive, accountable, and responsive to the needs of the citizenry.

Over time, the public enterprises have become an enduring feature of Pakistan’s economic landscape with a strong footprint in almost every sector of the economy — energy, transport and communication, manufacturing, finance, insurance, and even retail to name a few. The triage exercise shows that the 212 public enterprises left with the government make up 98 per cent of its assets and account for almost 100pc of losses. A World Bank report, Pakistan Federal Public Expenditure Review 2023, lists the country’s state-run firms as the worst in Asia. Since financial year 2016, Pakistan’s SOEs have been in a net loss. Every year, the loss is getting higher. The report says the top 14 loss-making SOEs guzzle more than Rs458bn of taxpayers’ money annually to stay afloat, although many of them should have been wound up or sold a long time ago. That their combined loans and guarantees rose to almost 10pc of GDP or Rs5.4 trillion in FY21, up from 3.1pc of GDP or Rs1.05tr in 2016, shows the kind of stress these entities are putting on the budget by contributing to high fiscal deficits over the last several years. They “impose a significant fiscal drain and pose a substantial financial risk to the government,” said the report.

The report says federal annual fiscal support to SOEs, in the form of equity injections, subsidies, and loans, has been substantial and growing, reaching 1.4pc of GDP in FY21. In addition, many government loans to SOEs are overdue and not being serviced. Moreover, contingent liabilities, in the form of loan guarantees provided by the government for SOEs to seek commercial loans, have been rapidly rising and were almost 4.5pc of GDP at end-FY21; taxes and dividends from SOEs averaged just 0.4pc of GDP during FY16-21, significantly lower than the government’s direct transfers amounting to 1.3pc of GDP to them.

Indeed, the performance of each SOE, or the lack of it, varies from sector to sector, and depends on the sectoral policies and governance structure of the companies concerned. The losses are mostly concentrated in the power and transport sector. Others such as oil and gas companies are still generating profits. This contrast in performance encourages many to suggest that the loss-making firms can still be salvaged through better management without disinvesting them.

The reality is that with no easy money available to continue financing these resource guzzlers, most would have to be sold or liquidated because they cannot be privatised, repaired or restructured as ‘going concerns’.