Unconvincing chants for the privatization of struggling state-owned Enterprises (SOEs) are echoing in Islamabad. With approximately 215 SOEs, of which 170 are commercial entities employing 475,000 individuals, the majority have struggled to achieve even a five percent return on their assets for three consecutive years.
Between FY2013-14 and 2018-19, the top 10 loss-making SOEs amassed losses exceeding Rs2.1 trillion, with the government injecting Rs2.5 trillion between 2018 and 2021, including a substantial subsidy of Rs1 trillion.
Privatization is considered an instrument for a more deregulated, market-based economy, but a significant portion of these SOEs may need to be liquidated rather than privatized in their current state.
An example is Pakistan International Airlines (PIA), which is poised as the first candidate for privatization, having accumulated an astounding loss of Rs713 billion and losing $7.1 billion since 2012.
PIA owns only 19 operational aircraft (compared to Air Blue’s 12), with 15 of them leased, incurring a monthly cost of $5 million. Moreover, its asset value falls short of covering its liabilities.
To proceed with PIA’s privatization, the government acknowledges the need to segregate non-core functions and assets, address its debt liabilities of nearly Rs300 billion, mostly backed by government guarantees, and transfer them to another corporate entity. The core assets marked for sale include routes, landing rights, core engineering services, and air service agreements.
However, there is a need for greater clarity on what is being sold as assets, their expected versus actual market value, and the perceived liabilities for the buyer.
Highly valued assets include routes, landing rights at major international airports, and time slots owned by PIA. The potential value of PIA’s slots today remains uncertain.
Determining the value of PIA’s 19 aircraft and the feasibility of taking over leased aircraft with outstanding liabilities is a complex matter. The government may need to reach settlements with lessors rather than resort to costly arbitration.
Properties owned or rented by PIA may not all be retained by the buyer for operational efficiency, potentially leading to numerous property sales and office closures.
An important question arises regarding the future of flights to destinations not served by private airlines. Would the private sector take over these routes, or would a transitional subsidy be necessary?
The buyer would also scrutinize the workforce, focusing on the excess number of employees, their skill set, and pension liabilities. Expecting the government to shoulder pension liabilities for retired employees, the buyer’s decision to retain or lay off workers would significantly affect the offer price.
Foreign investors’ interest in the transaction may be influenced by Pakistan’s image in terms of security, politics, economics, and regulations compared to global alternatives. Negotiating taxes and other concessions would also be a consideration.
The divestment of PIA can align with the principles of privatization if carried out openly and transparently, with preparation to secure the best price and considering efficiency, market competitiveness, and the public interest.
The funds generated from this transaction should not be diverted to unproductive government activities or poorly designed mega-infrastructure projects. Instead, they should contribute to retiring debt and promoting fiscal reforms in accordance with the law.