Forex Drain on Account of Freight

Pakistan State Oil (PSO) is Pakistan’s largest oil marketing company both by value and by volume. PSO is the nationally State Owned Enterprise (SOE) responsible for the import, storage, distribution and sale of refined petroleum products in the country. By all measures, PSO is a massive entity, one of Pakistan’s few companies with revenue streams in billions of US dollars. The size of these mind-boggling revenues makes sense when one analyzes the sheer scope of what PSO actually does. It has one of the largest (if not the largest) countrywide networks of petrol stations, providing fuel to low service delivery areas in the nooks and corners of the nation, selling fuel to power plants and airlines alike, with the corporation also being responsible for the import and sale of LNG to Pakistan’s gas utility companies SSGC and SNGPL.

 

But with great power comes great responsibility and the debt PSO owes to this nation is equally colossal, more specifically the organization (as of 1st February 2023) has accumulated PKR 718 billion (USD 2.66 billion) in receivables and PKR 219 billion (USD 0.81 billion) in payables due to Pakistan’s circular debt crisis.

To put things into perspective, PSO reported its highest-ever gross revenues of PKR 2.7 trillion for the year ended 30 June 2022 in its latest available annual report. The profit before taxes for the said period were PKR 147.8 billion. Suffice it to say that FY 2021-22 was a stellar year for PSO with some of the highest-ever returns.

 

The National Institute of Maritime Affairs (NIMA) has worked out that Pakistan spends approximately USD 6 – 8 billion annually as payment to foreign shipping companies for the carriage of approximately 100 million tons of cargo to and from Pakistan. A massive chunk of liquid imports of 18 to 21 million tons, representing around 70% of all liquid imports, is transported by foreign carriers of which PSO manages around half. Yet the company has staunchly remained in favor of importing petroleum products through foreign carriers shunning domestic carriage solutions.

 

Pakistan is currently in the midst of a full-blown economic crisis with the country’s reserves plummeting to critical levels. The public debt is climbing to dangerously unsustainable levels nearing Pakistan’s GDP. As per the State Bank of Pakistan, by September 2022, the Total Gross Public Debt for Pakistan was PKR 51,130.5 billion (USD 189 billion at present exchange rates) and we know for a fact that several billion dollars of debt have been added since then. In these circumstances it is absolutely stupefying that certain sections of the state persist in their wasteful ways, throwing away millions of dollars unnecessarily which could have gone to the less fortunate segments of our society.

 

It is the collective responsibility of all Pakistanis to band together in these tough economic times. Pakistan and by extension PSO should ensure that Pakistan’s funds are used to benefit the people of Pakistan, as opposed to the current outflows from the country, permanently depleting the nation’s collective wealth. Instead of giving business to a foreign entity and economy, Pakistan should focus on expanding its own capabilities, training its own people, adding to the health of our own economy.
 

Pakistan National Shipping Corporation (PNSC) is Pakistan’s sole ship-owning company and flag carrier. It has two 75,000-ton product tankers in its fleet, which are suitable for the import of refined petroleum products including MOGAS and Diesel. The aforementioned vessels were purchased for the sole purpose of carrying Pakistan’s refined petroleum products. Despite this, PSO has never engaged PNSC directly for the import of clean petroleum products and those vessels have been consigned to toil abroad.

 

PNSC’s LR-1 tanker vessels are employed overseas for the carriage of refined petroleum products instead of serving PSO’s requirements. The irony of the matter is that these vessels have been engaged by PSO’s third-party suppliers for carriage of PSO’s cargoes instead of carrying the cargoes directly for PSO thus incurring higher freight costs. Since freight and demurrage costs are a direct pass-through for PSO, it is the people of Pakistan who have continued to suffer by having to pay precious foreign exchange for hiring the ship as well as the international middlemen instead of dealing directly with the shipper.

 

There have been many occasions where PSO’s cargos have been carried to Pakistani ports on PNSC’s vessels but the vessels were chartered by PSO’s suppliers rather than by POS directly. PNSC has access to priority berthing and discounted port dues, all of which aid in materializing cheaper voyages thus depriving the nation of these benefits. Employing PNSC could result in freight and demurrage foreign exchange savings for the national exchequer in excess of USD 260 million, with those savings eventually being passed down to the people.

It is not considered an outlandish idea in Pakistan to hire a SOE, more specifically PNSC, for the carriage of liquid bulk cargos. PNSC already successfully carries more than 85% of all crude oil imported by refineries in Pakistan. Past results have indicated that timely and prompt deliveries have ensured that the nation’s energy supply chain remains intact.

 

The crucial benefit of an SOE is that ideally, the organization should have the strength of the state behind them, with implicit cooperation underpinning a cohesive relationship amongst all arms of the state. Circumstances, wherein state institutions have to convince each other for their patronage instead of just getting on with the job have resulted in creating inefficiencies in the supply chain, adding to the cost of doing business that has been borne by ordinary Pakistanis.

 

Our neighbor to the east, India has taken an altogether different approach by using all of the powers at its disposal to promote its domestic shipping industry. India has launched a scheme to provide INR 1,624 crore over five years as subsidy support to Indian shipping companies in global tenders floated by Ministries / Departments for the import of government cargo. Depending on the age of the vessel the subsidy ranges from 5% to 15% on the quote offered by a competing foreign shipping company or the actual difference between the quote offered by the Indian flag vessel and the quote offered by the competing foreign shipping company, whichever is less. The eligible shipping company is paid the subsidy amount along with the charter hire amount and the tendering agency will be then reimbursed. As per anecdotal evidence, this has resulted in many foreign shipping companies opting for the Indian flag, to cater to the Indian market and stay competitive with domestic shipping lines. This results in cheaper shipping services and encourages local employment at the same time, ensuring that the maritime economy thrives.

 

PSO currently employs CNF (Carriage and Freight) contracts to transport its refined petroleum cargo, whereas to engage a domestic shipping line they would have to use FOB (Free on Board) contracts. FOB can be a cheaper alternative because shipping rates are pre-determined and negotiated along with the selection of cost-effective insurance limits unlike CNF where the freight rate is more dependent on the spot market and is bundled with the cost of the product being imported. CNF contracts result in removing all legal responsibility for transport (including any damages during transportation) from the buyer, with responsibility resting with the seller. Therefore, these types of contracts can be far more expensive than FOB contracts in which case the buyer is responsible once the product has been loaded onto the vessel.

 

A contract based on CNF has exposure to foreign exchange volatility which can cause a drastic and sudden cost escalation. Contracting PNSC, a domestic entity, would result in better credit terms for PSO with payment in Pakistani Rupees instead of US Dollars, which are a drain on our exchequer. This would result in optimal cash management, with Pakistani entities being favored over foreign operators.

For its part, PNSC has always performed its obligation and has often gone beyond the call of duty. PNSC has given PSO fixed rates with PNSC absorbing market volatility. PNSC is more flexible in loading and discharging times unlike foreign carriers which can save PSO demurrage charges. PNSC has even fixed demurrage rates unlike foreign carriers which charge based on market rates. All of these factors can result in significant savings which are currently being ignored.

 

PSO has relied on CNF contracts with foreign shipping lines since that is the easiest way out, where all responsibility for the cargo rests with the shipper. This convenience has a high cost which needs to be paid. Sadly, the cost of PSO’s decisions is not being borne by PSO. Instead, the buck is being passed down to the people of Pakistan, where they have to pay for PSO’s choices at the fuel pump. This is indeed a low-hanging fruit, however, the fruit is rotting.

The challenge of SOEs — II

 The SOEs (State-Owned Enterprises) are generally being run at the whim of a chosen few, who are beholden to no system but instead their benefactors and appointers.

In this environment, there are no long-term plans in place for development of the entities and regard for the objective of profit maximization. Instead projects which are the short-term priority of the government of the day are green-lit, even if they are financially unviable, with time, effort and resources of SOEs being wasted.

A case in point is Pakistan National Shipping Corporation (PNSC), which has remained profitable since the fiscal year 2000–2001.

The challenge of SOEs – I

However, profitability is not the only criteria for success. PNSC’s vision and mission statement as defined on its website, setting the platform for goals of the organization is unintelligible, lacking any sort of forward thinking, oblivious of its responsibility to permeate the organization where all employees can meaningfully contribute towards the Corporation’s success.

The 2nd tier management at PNSC are professionals having an individual average of over 20 years’ experience in the industry. However, there is little that the 2nd tier management can do when the top leadership remains hamstrung in decision making because it lacks the knowledge and experience to efficiently and effectively run a highly complex and specialized organization.

PNSC has remained plagued with people who are unable to make critical decisions in a timely manner because they lack a firm comprehension of the situation and risks associated with decision-making due to which it is easier for them to set aside decisions than take decisions. In all of this sordid affair the ultimate loser has been PNSC and the people of Pakistan. The same is true for many other SOEs.

PNSC has been range-bound in its profits with the only exception being Fiscal Year 2021–22 as well as the current Fiscal Year where record profits were made and remain attributable to a historic surge in the freight market rates as well as the induction of four vessels at highly competitive pricing, with credit going to the Chairman and Board of Directors of the time who went out of their way to finalize the inductions.

It has recently been reported in various sections of the press that some of Pakistan’s SOEs have been offered to UAE’s investment arms, including Abu Dhabi Development Holding Company (ADO) and International Holdings Company (IHC). Both these entities typically have investment portfolios consisting of domestic UAE- based entities. Pakistan’s SOEs offered for investment include Oil and Gas Development Company Limited (OGDCL), Pakistan Petroleum Limited (PPL), National Bank of Pakistan (NBP), Pakistan International Airlines (PIA) and Pakistan National Shipping Corporation (PNSC).

The UAE’s potential acquisition of government shares in the aforementioned SOEs could be a godsend for these companies and for a cash-deprived government. Should the foreign investors decide to perform their pre-purchase due diligence of these entities, then every possible assistance must be afforded by the Federal Government for meaningful and successful due diligence of each organization.

The offer for investment in the equity of these organizations must include appointment of members to the Board of Directors along with management control with full option to replace the Chairman/CEO and CFO with individuals from the investor’s own team or hired them specifically for the purpose. This shall give the investors enough management control over the entities to make necessary management changes in these organizations with a view to improving efficiencies and in turn profits and returns.

As foreign investment flows into the respective listed organizations, with better management practices, ideally everybody should benefit. Increased performance will yield increased profit with more taxes and dividends being contributed to the government’s kitty.

Increased share prices of those entities will also see shareholders from the general public benefit from the investment thus boostting market capitalization.

With the Federal Government grappling with this latest bout of economic instability, this time replete with terrorism and flare-ups at our borders, it is evident that there seems to be a lack of long-term vision and direction, with SOEs being worse off as a result.

Attempts at policy re-calibration are interspersed over the years only punctuated with untimely reversals. Instability is keeping this nation from progressing. Our neighbors have developed by leaps and bounds simply because they have stability and continuation of consistent policy.

Unless we take stock of what has gone wrong instead of simply brushing it under the carpet, with truth and reconciliation for all, it seems we will remain doomed to repeat history with no regard for what the future may bring.

Saleable SOEs should be divested by the government to attract much-needed foreign exchange and in turn the private investors should be required to run the privatized organizations more efficiently than the government appointees. An opportunity for a win-win situation exists and the opportunity should be capitalized.

(Concluded)

 

Importance of good governance at PNSC

At the onset, I must state that though this article deliberates upon the importance of good governance at the Pakistan National Shipping Corporation (PNSC), however, it is stressed that good governance is critical to the success of any organization regardless of its size or purpose and even more so for the numerous public sector organizations of Pakistan.

Development of technologies which have dramatically cut down travel and communication times has prompted the creation of the modern and interconnected global economy as we know it today. The exponential economic growth witnessed by humanity in the last two centuries is underpinned by increasingly open lines of communication paired with the efficiency and cost effectiveness of oceanic shipping.

Shipping facilitates trade. Countries that have a large shipping sector are usually regarded as being economically strong and developed. As per the United Nations Conference on Trade and Development, over 80% of the volume of international trade in goods is carried by sea and the percentage is even higher for most developing countries.

For most economies, including that of Pakistan, shipping is the beating heart of the country, aiding the realization of economic potential, inducing growth, creation of employment, and establishing global connectivity for trading surplus, competitively advantaged commodities.

The recent developments between Russia and Ukraine have proved that sanctions imposed upon shipping can be used as an effective tool for cornering the economy of a nation. Sanction have been imposed upon the Russian shipping sector and similar sanctions were imposed in the past upon Iran’s shipping sector. However, time has proved that Iran could not be brought down to its knees mainly because of its strong and independent shipping base and similarly, sanctions upon Russia shall not yield the desired results primarily due to Russia’s strong shipping sector. Pakistan would be a very difference story altogether in the unfortunate event of sanctions or embargos being imposed upon it.

The shipping industry of a country, is also a reflection of the country itself. An economy, whether manufacturing or service based, no matter how big or small, will have the need to sell its products (exports) on the international markets. It will also have an appetite to consume foreign produce (imports) in an attempt to supplement supply of essential products or to satiate the demand for luxuries arising as a result of trade induced wealth creation, both of which may not be available domestically. Sick economies often purchase more than they sell and in order to fulfill the shortfall of available foreign exchange, end up indebted to foreign creditors.

When such economic conditions persist, the country tends to go down into a spiral of lackluster growth, with the export creation industry’s output refusing to sufficiently expand in order to balance the country’s books. With a lack of domestically impelled cargo, the local shipping industry tends to collapse, as national shipping lines are often propped up by national cargo requirements, with these smaller entities unable compete toe-to-toe with internationally established shipping behemoths such as Maersk, MSC, CMA CGM, and Hapag-Lloyd.

If that is not enough of a minefield, it is also widely acknowledged that shipping companies are some of the most internationally regulated entities on the planet, particularly in terms of environmental regulations. Upcoming regulations by International Maritime Organization (IMO), United States Coast Guard (USCG) and European Union (EU), in a bid to limit Green House Gas (GHG) emissions in order to limit global temperature increase to 1.5°C above pre-industrial levels, seek to significantly cut down on the global fleet’s emission profile. The intensity of these regulations are upsetting the international freight markets, as a significant portion of the global fleet will be non-compliant of the emissions criteria and will have to resort to limiting engine output and reducing sailing speed.

With the eventual goal of moving towards a zero emission shipping environment, the regulations will keep getting harsher over the years, with non-compliant vessels risking port arrest. For the sake of complying with these conditions, shipping companies must now move towards newer vessels with the latest cutting edge technologies. However, due to the extreme pace of regulations and short intervals in between, there is a significant risk that even new vessels built today could be obsolete within a decade, with ships’ lives normally being around a quarter of a century. Presently, there are no off-the-shelf solutions for creating a vessel with zero emissions, with the technology along with commercial and economical solutions still under development.

For countries like Pakistan, with a single entity, i.e. PNSC, representing the entirety of the local shipping industry, managing such a company whilst securing sufficient cargo and ensuring compliance with regulations is akin to a herculean task. The nature of the industry itself, demands that shipping companies be managed by professionals with vast experience in the field.

Pakistan’s largest neighbor in the region, India, with its Shipping Corporation of India (SCI) has a long history of being headed by professionals trained and developed within the SCI itself. Four out of the last five Chairman & Managing Directors of SCI, representing a combined tenure of 26 years have been promoted from within the organization, including H.K Joshi (Former Director Finance), Arun Kumar Gupta (Former Director Technical & Offshore), Sabhyasachi Hazra (Former Director Personnel & Administration) and P.K Srivastava. During this term SCI has grown immensely. Today it has a fleet of 133 vessels representing 5.36 million DWT and a joint venture for four LNG Carrier vessels with NYK, Mitsui and K-Line.

Unlike India, Sri Lanka has not fared so well. Sri Lanka had given charge of its sole national shipping company, Ceylon Shipping Corporation (CSC) to non-professionals, individuals with no commercial experience in managing shipping companies, back in 2014, when it ordered two new built bulk carriers from China. Allegedly, these two vessels were overpriced with higher than expected financing costs, whose debt servicing caused CSC to accrue losses for five years before returning to profitability in 2021. Today CSC is the smallest national shipping company in the region, with only 5 vessels to its name.

Similarly, Bangladesh Shipping Corporation (BSC) also remains in hot waters. The publicly listed state-owned corporation that owns and operates the Bangladesh flag-carrying ocean-going vessels incurred the liability during its procurement of six new vessels from China under a government to government (G2G) arrangement a few years ago. Recently, BSC has had trouble paying back its obligations and consequently the Bangladesh Government initiated a move to convert its TK 1,500 crore liabilities into equity. Going forward, troubles for BSC may persist as it continues to be managed by non-professionals instead of being helmed by seasoned industry professionals.

PNSC has been a profitable State Owned Entity (SOE) for more than a decade and while it has done well for itself, with a current fleet of 13 vessels including 2 recent inductions under its belt, it could have done much better. Like CSC, BSC and Pakistan’s general political climate, appointments in PNSC, especially for the top job have been made externally and for brief periods of time, which has prevented PNSC from acquiring stability and clarity of purpose in the long term.

By virtue of the PNSC Ordinance 1979, the Corporation is an autonomous body whose administrative and financial powers are vested in its Board of Directors. The Board comprises of 5 directors who are appointed by the Federal Government and 2 directors who are elected by the minority shareholders. Being a highly specialized and technical organization, it is imperative that the directors appointed on PNSC’s board have a maritime background or are capable enough to pick up the finer aspects of the trade very quickly.

It is imperative bod nominated or elected must meet the eligibility criteria laid down as per PNSC Ordinance 79 and SECP rules and imperative be qualified as certified director in accordance with SECP rules be certified director having qualified the exam for governance from SECP approved institution. Sadly, none is qualified It is intriguing that bod and said to be ministry approved sale of work horse of crude trade Afram ax tanker in today’s hot market if PNSC had no business for 20-year-old ship. Market is starving for such ships as IMO gave 25 years life to double hull tankers, Indian government recent notice is that ships up to 25-year-old can be registered. The sold tanker could have been used for Russian oil trade recently finalized by our government.

Despite the extremely challenging global economic environment, PNSC recently announced its highest ever annual net profit after tax of Rs.5,650 million for the year 2021-22 as compared to Rs.2,264 million for the preceding year. These results are phenomenal and were possible in part due to the professional conduct of its board and the capability of PNSC’s management to steer it to record profits in an otherwise difficult year. It is quite obvious that the biggest beneficiary of PNSC’s success shall be the economy of Pakistan.

One of the most pressing problems faced by PNSC is that of availability of experienced and capable human resources. The situation is further exacerbated by the lack of individuals, experienced in the shipping / maritime industries, present within Pakistan.

The small pool of such professionals restricts PNSC’s growth, with the Corporation being forced to hire and train its employees from square one. The problem is further exacerbated, when those same employees leave the Corporation for better prospects (and salaries) in the Middle East, which PNSC, being a government owned entity, cannot match. This leaves the Corporation in a perpetual hunt for experienced and qualified employees. While frustrating for PNSC, the Corporation has nonetheless, rolled up its sleeves and gotten on with the job of delivering on its commitments of securing our Nation’s vital energy supply chains, despite being short staffed.

Ethiopia, despite being land-locked, has invested heavily in building its shipping institutions by forming its own shipping company (Ethiopia Shipping Line) as well as its own Ethiopian Maritime Training Institute (EMTI) for training its own cadets to sail on its own fleet. EMTI is quite notable for offering its students Post Graduate programs, with the objective of fully developing its students by putting them on the pathway of fully recognized degrees instead of certifications, ensuring international/domestic employability, offshore as well as onshore managerial positions. Pakistan stands to learn from Ethiopia’s experience, in order to cultivate a suitable pool of talent, specialized in the maritime/shipping industry, who could ably serve PNSC as well as the country itself.

The critical nature of shipping represents a vital link to a nation’s economy and it is the responsibility of every country with a national shipping line to be focused on its welfare and growth. Shipping’s inherent technicalities mean that it needs the right people for the right job. It takes decades of consistent effort to build the knowledge base and internal capacity of an organization and a few years of poor governance to destroy that organizational.

Numerous SOEs in Pakistan are a clear example of such poor governance stemming from the insistence of vested interests to hire or appoint heads of organizations who are neither professionally competent nor have the required knowledge to run technical organizations at the national level.

Pakistan has a long way to go in developing a seaworthy pool of talent which is internationally competitive and there is a need to reinvigorate our educational and cadet training programs to enhance their acceptability and ensure that our graduates can not only discharge duties at the sea but also in a managerial capacity onshore. Shipping can make or break a nation and it is high time Pakistan’s government become irrevocably cognizant of this fact.

The challenge of SOEs – I

The state of Pakistan’s economy has been a constant subject of discussion over the past month or so in the print and electronic media and is expected to remain as such in the coming days and weeks. Numerous scholars, several former finance ministers, many economists, all far more learned than I, have gone on to expound on theories purporting to show what has gone wrong in our country.

 

They have readily broached various patchwork solutions that they believe may be implemented in order in relieve the Pakistan’s economy of its persistently paralyzing debt and under-productivity.

All arguments and theories always wind back to debt and under-productivity or as they are esoterically known to the more biblically disposed sentimentalists; greed and sloth, theologized as part of the seven deadly sins. All of Pakistan’s problems, it is said, stem from its insatiable appetite for luxury and leisure at the expense of merit and hard work.

This 221 million-strong nation tends to consume disproportionately more than it can produce; to be precise it can consume USD 44 billion (the gap between imports and exports in 2021) more than it can produce.

Effectively, all past governments going back several decades, have presided over the country’s economic woes by proceeding to borrow money from international lenders, thus kicking the can down the road, with all of those funds eventually ending up subsidizing inefficiencies in Pakistan’s economy with no meaningful growth to speak of.

Subsidising inefficiencies in the economy here primarily means that the exchange rate has been kept artificially low, which has allowed the population to obtain an imported lifestyle and level of consumption that is not consistent with what they have managed to produce. In other words, the artificial strength of the Rupee has subsidized imports to the detriment of exports.

This is synonymous with Greece’s suffering during the Eurozone crisis in 2009, where the debt levels spiraled out of control simply because the Greek economy was not sufficiently productive, with inconsistently high income levels.

The Greeks kept borrowing and borrowing without thinking about how they will finance the ever- increasing debt servicing costs. Eventually, after undertaking painful reforms and going through a long and severe recession which saw a large chunk of their skilled population emigrating, the Greek economy became more competitive due to deflation, with Greek wages falling by around 20%. From a humanitarian point of view, all of this may sound cruel but unfortunately downturns in economic cycles cannot be appeased or wished away.

The creditor will always want his pound of flesh and unless countries proactively manage their finances and the economy as a whole, this will always be the end result; the invisible hand at work automatically seeking to correct market imbalances by whatever means necessary.

Certain segments of the population are guiltier than others. The elites simply do not understand that while their personal bank accounts may be larger than life, allowing them to act with impunity, the collective bank account of the country, in which they are but an equal shareholder along with the rest of Pakistan’s population, i.e. Pakistan’s foreign exchange reserves, is in crisis (currently with net negative equity). This effectively makes their personal billions worthless.

Leaving the problem to nameless others has never been a viable solution. It is incumbent upon every citizen of this nation, who derives their livelihood from this soil, to act responsibly where the welfare of fellow citizens is concerned. Just as during the pandemic, health officials instructed the population to wear masks in order to avoid the spread of the virus, guarding themselves and others, so too now we must mutually act together to insulate Pakistan from foreign reliance.

Like an addict, even in times of crisis, Pakistan has not acted sufficiently to save its own skin. It was only through IMF’s interventions that Pakistan reluctantly took the harsh but essential measures in order to address the malaise rotting our state. Even though Pakistan has started to devalue its currency, it may no longer be sufficient as our reserves too persist in their decline.

As per State Bank of Pakistan, in January 2021, the monthly weighted average exchange rate was 160.52; same time next year it was 176.75 and in January 2023 it was 235.25. This represents an overall devaluation exceeding 33% in a matter of three years. Similarly, Pakistan’s reserves in FY 2020 – 21 were USD 24.4 billion, in FY 2021 – 22 USD 15.5 billion and then in January 2023, USD 9.4 billion (USD 3.6 billion with the State Bank and USD 5.8 billion with commercial banks), with an overall decline of 61.5%.

Pakistan has been blessed with abundant resources as well as institutions, to the point where it is far better positioned to be self-reliant in this globalized world than other nations. We have ample tracts of agricultural land, energy as well as mineral resources, plentiful cheap labor, vast industrial capacity as well as private and State Owned Enterprises (SOEs) to marshal and co-ordinate all the factors of production.

Pakistan must take up the initiative and immediately prioritize its domestic industry on a war footing. Inefficient and bureaucratic setups, particularly in SOEs, have to be done away with.

Just from the top of my head, a listed SOE has to report to at least 12 separate entities including the Senate Standing Committee, National Assembly Standing Committee, concerned Ministry (and Minister), Federal Cabinet, FIA, NAB, Auditor General of Pakistan, the SECP, FBR, two external auditors for annual and half-yearly audits with the cherry on top of the cake being the Public Procurement Regulatory Authority. I am absolutely sure I missed a few more from inclusion in this illustrious list.

Any one of the aforementioned parties being unhappy or unsatisfied is enough for the top management to get the sack (and they regularly do) or even go to jail. With all these reporting and compliance operations, SOEs are incentivized towards doing nothing (if they do nothing then will not get into trouble for anything) or otherwise outsourcing their jobs to third party contractors. Well-educated and experienced professionals are unwilling to join due to uncompetitive pay scales as well as persecution and public flogging of employees, which is creating a perennial vacuum of competent leadership.

All this reporting has not dissuaded criminal enterprise within and around SOEs either; they have just shifted with the times to newer more discreet methods. So when the losses pile on, the SOEs are left helpless.

As per State-Owned Enterprises Triage published by the Finance Division, there are currently 212 SOEs operating in various sectors of Pakistan, with 85 commercial SOEs and a further 83 subsidiaries of the commercial SOEs. The 85 commercial SOEs mainly operate in 7 sectors: Power, Oil & Gas; Infrastructure, Transport & Communication; Manufacturing, Mining & Engineering; Finance; Industrial Estate Development & Management; and Wholesale, Retail and Marketing.

The overall revenue of all SOEs in 2018-19 was PKR 4 trillion (approx.), representing 10% of nominal GDP, while the book value of their assets was PKR 19 trillion. Additionally, SOEs provided employment to more than 450,000 people which constitutes around 0.8% of the total workforce. In FY 2018–19, the commercial SOEs collectively recorded net losses of PKR 143 billion.

Moreover, the sum of the losses of the top 10 loss-making SOEs contributes around 90% to the total losses of SOEs portfolio each year. NHA, Pakistan Railways, PIA and power sector DISCOs have been among the major, top 10 loss-making SOEs. Since FY 2015–16 SOEs have consistently incurred significant losses, creating a heavy burden on the nation’s fiscal position.

A large chunk of Pakistan’s economic capacity is locked away in SOEs, mired in the lowest rungs of unproductivity; they have been left to languish for far too long. It should no longer be the state’s business to operate such entities on a commercial basis. The government should only monitor and guide the industry through effective policy measures to provide incentives to nurture and aid capacity building.

Precious taxpayer’s money gets injected again and again within these entities, yet they have not been able to stand on their own two feet and continue to hemorrhage. Those funds can be put to good use in long-term development projects for the good of the less privileged amongst us. This speaks volumes on the inept management at SOEs and politically motivated poor decision making by leaders at helm of the government.

Some SOEs have performed well over the years and have remained profitable. The largest and most profitable of these include Government Holdings (Private) Limited, Pak Arab Refinery Company and Pak Kuwait Investment Company (Private) Limited. All three of these entities have one thing in common.

Their management and performance is not necessarily controlled by the Government of Pakistan despite having majority ownership. Government Holding (Private) Limited earns through exclusive rights of shareholding with international investment partners in Oil & Gas Exploration and Production sector; whereas Pak Arab Refinery and Pak Kuwait Investment’s managements are guided by its foreign, minority shareholders who are patently experienced professionals.

For all other SOEs, Pakistan has the bad habit of appointing career bureaucrats, who have absolutely no commercial experience or even technical knowledge of the concerned industry, to the Board of Directors (shockingly sometimes even getting themselves appointed as CEOs), which can only result in poor outcomes if the leadership is clueless about the industry and modern business management practices, which has undoubtedly been the case. Oftentimes, these appointments are very short in tenure.

They only last as long as the top management has the favor of the ministry or the government of the day. As soon as there is a change in the government or ministry, there are bound to be changes in the leadership at SOEs. These frequent comings and goings repeatedly change the priorities of the SOEs themselves, with any long-term planning being impossible.

As per the aforementioned Triage Report, the Government itself rates 21 entities, excluding the three mentioned above but including NBP, NTDC, PSO, PQA, PNSC and TCP as “Profitable SOEs” to be retained. However, this scribe is unaware if any efforts have been made to assess whether the so-called “good performance” was the best which could have been done.

(To be continued tomorrow)