he debate over how to reform state-owned enterprises is heating up once again. Given the fiscal deficits, public debt and the persistent burden of loss making SOEs, the government is confronted with a crucial question: is the country to pursue outright privatisation or seek public-private partnerships?

This is not a new debate. However, the recent decision to privatise a flagship asset, i.e., Pakistan International Airlines has brought this debate to the forefront. The discussion has moved beyond the ideology towards public interest, governance, strategic interest and sustainability.

Pakistan’s SOE challenge

Pakistan has more than 200 SOEs, including those in aviation, railways, energy, steel, banking and infrastructure sectors. Most of the SOEs are incurring huge losses because of overstaffing, political meddling, poor management and outdated technology. It has been estimated that the SOEs cost government hundreds of billions of rupees every year. It is argued that the money would be better spent on the provisioning of basic services in health and education sectors.

The reform of these enterprises has thus become an economic necessity. The problem is not limited to reducing fiscal deficit; it is also about choosing reform models that allow strategic control, guard public interest and ensure sustainability.

Privatisation: efficiency and risks

Privatisation is partial or complete handing over of the ownership and control of public properties to the private sector. It is expected to bring/ restore creativity, efficiency and prudence. In this arrangement, the recurring financial burden, too, is shifted away as the commercial risk is transferred to the private sector.

Pakistan witnessed a wave of privatisation in the early 1990s when a number of units in the manufacturing, banking and telecommunication sectors were offered for private sector takeover. The telecommunication sector is often highlighted as a success story as a competitive framework has boosted the number of services being offered and resulted in reduced customer prices.

However, those privatisation decisions were criticised for alleged undervaluation of assets, lack of transparency and politicisation. Some of the privatised entities failed to deliver expected performance. Some were eventually shut down leading to job losses and public dissatisfaction. These lessons underscore the need for careful evaluation and strategic planning in privatisation initiatives.

The case of PIA

PIA was once a source of national pride. However, over recent decades, it had incurred gigantic losses on account of overstaffing, political appointments, inefficient operations and poor fleet management. Governments spent billions of rupees to save the organization but it remained one of the largest drains on the exchequer.

Supporters of privatisation say that PIA’s problems are deep-seated and could not have been resolved by the government. Privatisation, they say, might solve the problem by removing unnecessary staff, restructuring service routes and modernising aircraft to restore profitability.

However, there are still some concerns. Trade unions are afraid of large-scale layoffs and deterioration of worker benefits. The new management might abandon unprofitable but strategically important routes. The sale amidst operational and financial challenges has also raised questions about potential undervaluation.

Though the process of privatisation has been completed, its impact on service, employment and strategic matters remains to be seen.

Public-private partnerships

Public-private partnerships (PPP) merge the advantages of public control and supervision with private efficiency. In a PPP, government retains ownership but the private sector can assist it in the financing, operations or management through contractual arrangements.

PPPs have been used across the world to manage infrastructure, transport, ports and energy sectors. In Pakistan, there have been examples of road network, energy generation and coal mining.

In PIA’s case, a PPP solution could have included outsourcing operations and management to a private airline group while retaining government ownership. This could have mitigated risks associated with layoff, asset undervaluation and route abandonment, while allowing reforms to improve efficiency.

Privatization vs PPPs

The fundamental difference between PPPs and privatisation lies in ownership, control and risk allocation. Privatisation transfers ownership and long-term risk to the private sector. This may bring immediate fiscal relief at the cost of limiting state control. PPPs distribute risks between public and private partners and allow continued government oversight.

From a fiscal perspective, privatisation brings in upfront revenue and avoids subsidies. PPP reduces long-term operational burdens without any upfront cash flow. In terms of public interest, PPPs are more flexible for the inclusion of service standards, price controls and non-performance penalties.

PPPs demand strong institutional capacity. Poorly drafted contracts and weak oversight can create hidden liabilities for government. Neither model can guarantee success in the absence of strong regulation, transparency and competent governance.

A prudent approach

Now that the PIA has been privatised, the focus should shift from opposition to learning from the experience. An important concern here is how a carefully planned and evidence-based framework for future SOE’s reforms framework can be devised. The following key principles come to mind:

Strategic significance: Some assets, crucial to national security or considered an essential service, may need to be retained as government property.

Market competitiveness: Competitive market enterprises are more amenable to privatisation.

Financial viability: Loss-making SOEs might have to be restructured prior to privatisation.

Regulatory capacity: In order to ensure adherence and discourage misuse, regulatory capacity needs to be enhanced and refined.

Social and labour impact: Service accessibility, employment and affordability must be safeguarded.

Sector-specific recommendations

Aviation

Recommended approach: PPP-led management followed by potential partial privatisation once performance stabilises.

Justification: This protects strategic connectivity and labour rights while improving operational efficiency.

Energy distribution companies

Recommended approach: PPP or concession management.

Justification: The natural monopolies are incurring losses on a regular basis. Private operator expertise will enhance efficiency; the tariffs will need regulating.

Banking and insurance SOEs

Recommended approach: privatisation

Justification: The presence of a competitive market and limited strategic restriction.

Railways

Recommended approach: PPP for operation; public ownership of assets.

Justification: Private operators improve efficiency but the state retains the ownership of assets because of the capital-intensive infrastructure with high social value.

Manufacturing units (steel, cement etc)

Recommended approach: Privatisation or closure.

Justification: These are non-strategic assets. Privatisation can ensure market-driven efficiency where there have been consistent losses.

Institutional reforms

Irrespective of the chosen model, three key changes are essential:

Strengthen regulation: Autonomous and capable regulatory bodies must be put in place before privatisation or PPP.

Transparency: This means openness about valuation, bidding and contract terms to ensure public confidence.

Labour transition: Re-skilling, voluntary separation programmes and pension protection may reduce the social disruption.

Lessons and the way forward

PIA’s privatisation marks a turning point in the economic reforms journey of Pakistan. Given that the decision is irreversible, the key takeaways are in the realm of institutional learning and development of sector-specific evidence-based frameworks. The future of national assets must focus on transparency and national development goals rather than short-term fiscal gain.

Public Private Partnership Authority should play a pivotal role to define the framework in which the remaining SOEs will be assessed on defined criteria of strategic importance, market consideration, financial ramification, social effect and readiness to regulate. In many sectors, mainly energy, transportation and infrastructure, PPP-led reforms may strike a balance to achieve efficiency gains without compromising national interest and public oversight.

The objective is not simply to privatise or outsource but to build a sustainable, efficient and accountable public sector ecosystem in the SOEs that can enable economic development, safeguard citizens and preserve strategic national assets.

The writer, an independent consultant on sustainable public private partnership projects, holds a PhD degree in the subject. He can be reached via [email protected]