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In business, Pakistan's government bleeds

Monday - 6/10/2013, 6:14am  ET

In this Saturday, June 8, 2013 photo, a passenger checks his e-ticket at Benazir Bhutto airport in Islamabad, Pakistan. Most of Pakistan's planes are more than 25 years old and not in the best of shape, its staff is bloated, and every flight is probably costing the state money instead of adding to its bottom line, with the carrier losing some $300 million a year. That’s emblematic of the problems with Pakistan’s state-owned enterprises, underlining how difficult it will be for Prime Minister Nawaz Sharif to carry out a key promise for rebuilding the economy, rescuing, reforming and possibly privatizing a slew of state companies. (AP Photo/Anjum Naveed)

Associated Press

ISLAMABAD (AP) -- With every flight, Pakistan's state-owned airline demonstrates the economic challenges facing the country's new government.

Each time a plane belonging to Pakistan International Airlines takes off, odds are the aircraft is more than 25 years old and not in the best of shape. It is likely running late. It probably has a bigger crew than necessary -- the airline has four, even five, times the staff per plane than a typical carrier. And ultimately, each flight is probably costing the state of Pakistan money instead of adding to its bottom line.

PIA loses the equivalent of around $305 million a year, and that's emblematic of the problems with Pakistan's state-owned enterprises. Experts estimate state-owned firms lose at least $4.1 billion a year, holes the debt-ridden government plugs through cash injections, guaranteeing loans or other means. And that's not even counting the massive financial problems in the power sector, where some $5.1 billion in so-called "circular debt" means some parts of the country go without electricity for up to 20 hours a day.

The new government of Prime Minister Nawaz Sharif has made rescuing, reforming and possibly privatizing state-owned enterprises a priority. But although Sharif's government has a strong mandate and isn't relying on coalition partners, analysts predict the heavy political challenges mean it will likely have only limited success.

"Their election manifesto has certain proposals which could improve the economics tremendously, but that could hurt the rich and powerful in the country," said Shahid Hasan Siddiqui, chairman and chief executive of the Research Institute of Islamic Banking and Finance based in Karachi. Even if privatization occurs, he warned, that process "is not transparent. There is corruption in it."

Pakistan lists dozens of entities as state-owned enterprises, covering sectors such as oil, steel, fertilizer, transport, and more, though not all are intended to generate revenue. Over the years, various ruling parties have used such businesses as sources of jobs they could hand out to supporters, even as they've failed to invest in maintenance and upgrades of the infrastructure the firms needed.

Take Pakistan Railways. Of the 465 locomotives in its possession, just 152 are operating, according to spokesman Dildar Hussain. Some observers say the number is actually closer to 50. Cargo lines that used to witness many trains a day are now lucky if one shows up a week. Years ago, Pakistan Railways used to run 430 passenger trains a day. Now that's down to 96, Hussain said. Many of its 80,000 employees get subsidized housing and other perks, but often have nothing to do.

One former top railway official, Muhammad Saleem, said corruption, bureaucratic red tape and competition from private trucks and other entities all aided the downfall of a system that was once a pride of Pakistan. Above all, he blamed the lack of will by successive governments to improve the system -- or to let it run independently and free of political meddling.

"The railway should be given the empowerment it needs to fully carry passengers and goods," Saleem said. But the politics are so poisonous and the bureaucracy so sclerotic that "even a single small policy change could take months to get through."

In their campaign manifesto, Sharif and his party, the Pakistan Muslim League-N, promise that "professional competence and merit will be the only criteria for appointment of boards and CEOs" and that their government will "stop every kind of political interference in the affairs of these enterprises." The manifesto also mentions privatization as an option, though it is more open-ended as to which state-owned companies will be slated for that.

"We are hoping that in six months to nine months they can be turned around or losses will come down," said Sartaj Aziz, a top adviser to Sharif.

As far as privatization goes, Sharif has a track record to point to. Back in the 1990s, when he twice served as prime minister, his government privatized a handful of banks that soon became much more efficient institutions. But economists say banks are easy to privatize compared to the enterprises left in Pakistan's public sector today.

Some of the businesses have negative equity, and it's unlikely anyone inside Pakistan has the resources to buy them out.

Even if someone, foreigner or Pakistani, does step up, they and the government may end up regretting the political repercussions. Many employees, through unions, would work to prevent any sell-off of their companies that would mean losing their jobs and -- more important for some -- the side benefits they get from bribes and corruption. Some politically connected private businessmen who have contracts with state-owned companies also may prefer the existing arrangements.

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