According to OECD (Organisation for Economic Cooperation and Development) in its report (2018) 'Ownership and governance of state-owned enterprises: a compendium of national practices', such rationale or objectives behind ownership in countries in general range from '(1) supporting national economics and strategic interests; (2) ensuring continued national ownership of enterprises; (3) supplying specific public goods or services (after determining the market cannot supply the same goods or services); (4) performing business operations in a "natural" monopoly situation; and (5) creating or maintaining a state-owned monopoly (or oligopoly) where market regulation is deemed infeasible or inefficient'. Based on a sample of 30 countries (Pakistan not included) of various economic levels, the report indicates that the two most prevalent rationales as being points (1) and (3) respectively.
In Pakistan, there are around 170 SOEs (or PSCs) and it is important that government's committee on reforming SOEs should provide an ownership rationale for each of those SOEs, including in the exercise, reasons as to why the market could- or should not provide the same goods and services in the case of each SOE. This latter exercise will also allow better identify how much, and if at all, a certain SOE should be opened for private participation.
Then is the aspect of ownership entity, which the report (2015) 'OECD guidelines on corporate governance of state-owned enterprises' defines as '...the part of the state responsible for the ownership function, or the exercise of ownership rights in SOEs... [and] can be understood to mean either a single state ownership agency, a coordinating agency or a government ministry responsible for exercising state ownership'. Hence, depending on a particular way, there are five types of state ownership models identified by OECD in the same report.
The first in the 'centralized model' where the first sub-category - the 'agency or ministry' sub-model type - is that ownership function is carried out by a single government institution, which may be a specialised ownership agency or a designated government ministry. In Asia, China, Indonesia, and Korea belong to this model. Under this model, among 2000 largest companies globally in 2016, in Asia, China had the highest number of SOEs (companies with at least one-third of state ownership) at 141, Indonesia having 5 companies, and Korea had 3.
At the same time, the ownership entities of the three countries being (1) State-Owned Assets Supervision and Administration Commission (SASAC; China), (2) Ministry of State-Owned Enterprises (Indonesia), and (3) Ministry of Strategy and Finance (Korea). It would be pertinent to mention that SASAC, at the end of 2014, was responsible for 110 non-financial central SOEs, to which were affiliated 38,000 legal entities; hence managing a substantial number of SOEs and affiliated entities.
The second sub-category within the overall centralized model, and to which Pakistan intends to subscribe - details of which will be given in the later part of this article - is the formation of a 'holding company' to exercise the ownership function of SOEs on behalf of the state. In Asia, for example, the countries that follow it include (1) Bhutan (Druk Holding and Investment Limited), (2) Kazakhstan (Samruk-Kazyna), and (3) Singapore (Temasek Holding), which as compared to the former two countries, is a lot more successful in managing the SOEs, especially given taking forward the same example of 2000 large companies globally in 2016, Singapore had 6. Still, the holding company model is not that successful overall when compared with the first sub-category of the centralized model.
While all the ownership models and corresponding country examples should be studied by the committee in Pakistan responsible for reforming SOEs, SASAC and the underlying law- The Law of the People's Republic of China on the State-Owned Assets of Enterprises, 2009- which forms its basis, should be focused upon in particular. Such a study should also be made as Pakistan works towards a new 'State-Owned Enterprise Law', the draft of which the country intends to produce by end-December 2019, as per the Extended Fund Facility (EFF) programme document. Here, according to EFF document, Pakistan would produce this with the technical assistance of IMF (International Monetary Fund), which begs the question if assistance was also sought from 'OECD Working Party on State Ownership and Privatisation Practices' which 'facilitates policy dialogue and information exchange between OECD Member countries and key partners on improving corporate governance of state-owned enterprises and implementing privatisation policies'. This would indeed be an important source missed, if such technical assistance were not sought before formulation of the final draft.
Similarly, the EFF document also indicates that Pakistan intends to establish a 'holding company' as part of the SOE reform agenda. As has been and would be indicated that this is one of the ownership models, and other ownership models should also be analyzed given the successful experience as well of countries with them, before deciding on the holding company ownership model. Here, the country would benefit from also focusing - as emphasized earlier - from analysing the centralized model, and in particular the first sub-category to which China belongs, and the success with which it managed its SOEs-led phenomenal growth performance over the years. At the same time, as a futuristic study for planning purpose with regard to managing SOEs, Pakistan should also learn, as why and in what circumstances, China decided to move towards allowing greater private sector participation in SOEs, including the introduction of Mixed-Ownership Enterprises (MOEs) framework.
(To be continued on Sunday)
(The writer holds a PhD in Economics from the University of Barcelona; he previously worked at International Monetary Fund). He tweets @omerjaved7