Why corporate sector remains stunted
Why corporate sector remains stunted
By J.M.Shaikh
RECENTLY, there has been a sudden increase in international focus on the Indian corporate sector. This has been triggered by significant events like the acquisition of Arcelor by the Mittal Group and Corus Steel by the Tata Group. This has brought increasing realisation in Pakistan that the Indian corporate sector is now in a different league as compared to Pakistan’s corporate sector.Some have considered it important to go through a process of introspection for identifying reasons for the relatively poor state of Pakistan’s corporate sector. Apologists for the delinquent performance of Pakistan’s corporate sector have frequently held Zulfikar Ali Bhutto’s nationalisation policy responsible. Mr Shahid Javed Burki is one contributor to this line of thinking, not realising that proffering “soft alibis” is not only music to the ears of our business leaders but masks the real cause behind the lacklustre performance of the corporate sector.This article tries to put the nationalisation policies of the Bhutto era in a proper perspective and delineates the real reasons behind the prevailing malaise in the corporate sector. It is particularly important to set the record straight since the Indian experience confirms that despite nationalisation in India and a large public sector, the corporate sector has continued to march forward. It is natural, therefore, to ask why the position is different in Pakistan.According to conventional wisdom, private sector management is inherently superior to public sector management. However, there is little empirical evidence to support the veracity of this hypothesis in Pakistan.A brief survey of the corporate landscape in Pakistan reveals that while the banking sector does, indeed, represent a successful transformation triggered primarily by change of management from public to private sector through privatisation, other corporate achievers like PSO, PARCO, OGDC and the two Suis are all in the public sector as was the National Refinery till recently.It is also important to look at the post-privatisation performance of privatised enterprises. Performance of privatised banks supports this hypothesis, as does the post-privatisation performance of Millat Tractors, Balochistan Wheels and D.G. Khan Cement.At the same time, there are countless examples of units showing deteriorating performance in the post-privatisation phase. These include Bankers’ Equity, Zeal Pak Cement, Ghandhara Industries, Pakistan PVC and Sind Alkalis, not to mention others shut down after privatisation.Another common fallacy explaining poor corporate performance is that nationalisation retarded the development of managerial and technical skills. A serious examination reveals that nationalisation, in fact, enlarged the pool of professional managers.The most significant aspect of nationalisation during the 1972 to 1974 period was the clear strategy to take over ownership control but not the management of nationalised industries. In that early phase, nationalisation did not imply the replacement of professional managers by bureaucratic nominees.As a deliberate policy, the first step after nationalisation was to replace the owner chief executives by the senior-most professional managers in the nationalised enterprise. Serious efforts were also made to induct outstanding professionals and distinguished entrepreneurs in senior management level positions.This strategy generated a huge reservoir of commitment and enthusiasm from professional management. As a consequence, there was a turnaround in performance in nationalised units with peak levels attained in 1974-1975. Since then, there was a gradual but perceptible deterioration not only because of whimsical changes in key personnel but more importantly because of the failure of the administrative structure (ministry of production/BIM) to effectively monitor performance and evaluate outcomes linking these to an appropriate incentive system.Despite this environment, some public sector-managed enterprises continued to perform well because of the individual chief executive’s commitment and integrity. At the same time, however, even the best of professional managers under public sector management continued to be victims of policy imperatives.Let us analyse the nature of manufacturing enterprises nationalised in 1972. These were largely modest in size and in operations. Another common feature was the near absence of professional management. Even in the case of the National Refinery, owing to product monopoly, no need was felt for establishing any marketing platform. In the automobile sector, companies were largely assembly operations. In other sectors — cement, light engineering and chemicals — the manufacturing processes were simple and there were few marketing challenges, given a captive local market and high tariff barriers against imports.In terms of financial performance, some of the companies had done well, but principally on account of very high tariff protection, subsidised raw material prices, tax incentives and near-oligopolistic positions. Financial performance, therefore, was not a reflection of entrepreneurial ability or managerial skill.With import substitution as the mantra of Ayub Khan’s policies and the “bonus voucher scheme” providing the facilitating mechanism, many of these industries continued to make financial profits even while operating considerably below the optimum capacity utilisation.While many economists continue to wax lyrical about Pakistan’s industrial success during the Ayub era, there seems to be reluctance on their part to reflect on the benefits of that era to the country. When evaluated against revenue generated for the government in terms of taxes, benefits for the workers in terms of wages and working conditions and benefits to minority shareholders in terms of distribution of dividends, the so-called golden decade of the 1960s does not show a pretty picture.It follows, therefore, that beyond ideological commitment, the government of Zulfikar Ali Bhutto had practical reasons to consider nationalisation as a viable option for a transformation of the industrial base of the country.The broad objectives of nationalisation of his government included introduction of professional management, enhancement of local value addition and control on prices. Let us examine the extent to which these objectives were achieved.The demand for professional management increased with nationalisation and this was met both through in-house training as well as by public sector institutions. There was a conscious effort at increasing local value addition. Prices were also kept in check as evidenced by price stability over a long period in at least two commodities: cement and vegetable ghee. The other societal benefits included increased revenue for the exchequer and better working conditions for labour. No, nationalisation was not the unmitigated disaster that Mr Burki and others make it out to be.It is important to identify the underlying causes for the stunted growth of our corporate sector. The underlying causes are easier to identify if we focus on one important sector — textile — which never faced the sword of nationalisation. This sector, in which Pakistan enjoys an inherent comparative advantage, has been the most favoured child of the state throughout our history. It has been showered with a wide range of “concessions” including low import duty on machinery, high levels of protection against import of textile products, area-specific income tax exemption and concessional project financing.Yet, the textile sector is crying out for more state crutches to compete internationally. Reared on subsidised raw cotton and created through state licensing mechanism and surviving on concessions, there has never been any incentive for the sector to grow and compete with “adults”.The textile business is cyclical in nature. Consequently, there are good years and bad years. In good years, surplus profits are set aside and partially invested in upgradation for enhancing productivity and efficiency so that in lean years businesses can live with lower margins.In Pakistan, the pattern has been very different. Surplus profits during good years have neither been distributed to shareholders, nor retained in businesses, nor used for upgradation or modernisation. They have either been stashed away out of the country or wasted on conspicuous consumption.During the bad years, there has been a familiar stampede in running to catch hold of the coat-tails of the government and pleading for more concessions. The most frequently used tactic is the threat of large-scale shutdown of manufacturing units. The state has been more than accommodating in responding to these distress calls. In 2006 alone, the loan write-offs and other forms of financial relief by the five largest banks (NBP, HBL, MCB, UBL, ABL) to textile companies aggregate to over six billion rupees.The sector is in crises yet again and the government is reportedly putting together yet another “concession package”. These are not likely to redress the fundamental structural problems. The sector is segmented with a large number of units of small size, lacking managerial capacity and marketing infrastructure, poor quality control and absence of the requisite skill sets among production workers. It is in the aforesaid areas where we have slipped sharply against international competitors.Unfortunately, there are no easy or quick solutions. Any effective turnaround would require a fundamental change in the mindset of textile magnates. They need to transform from a rentier class to one of entrepreneurs. Only then can they come to terms with the permanent change in the global trading paradigm in the post-MFA, post-WTO environment.The corporate leaders in India were not born in a day. They have been reared on the tradition of pursuing entrepreneurial flair, a high propensity to re-invest and to expand and diversify. The ramifications of globalisation were fully understood and the corporate sector was adequately geared to maximise opportunities. This confidence was based on the large size of individual corporate groups and the availability of a large pool of managerial manpower. It was, thus, only a matter of time before Indian corporates acquired a global status.Pakistan, on the other hand, both at the government and private sector level, has been far less prepared. This is the principal reason why we face this dilemma.Is there hope of a transformation? Sadly not. Our corporate sector has neither the vision nor is attuned to performing the role of entrepreneurs while lacking the requisite managerial and technical manpower that could enable us to graduate from a commodity producer and exporter to a producer and exporter of specialised products. There is hardly any other sector where the scale of operations or the level of technology can place Pakistan in the same league as India.It is not that we were destined to fall by the wayside. The private sector has consciously chosen to shy away from preparing itself to prosper in a competitive environment while the government has failed to create the human resource platform — an essential element of the enabling environment.The writer is chief executive of a financial sector company in Lahore.
By J.M.Shaikh
RECENTLY, there has been a sudden increase in international focus on the Indian corporate sector. This has been triggered by significant events like the acquisition of Arcelor by the Mittal Group and Corus Steel by the Tata Group. This has brought increasing realisation in Pakistan that the Indian corporate sector is now in a different league as compared to Pakistan’s corporate sector.Some have considered it important to go through a process of introspection for identifying reasons for the relatively poor state of Pakistan’s corporate sector. Apologists for the delinquent performance of Pakistan’s corporate sector have frequently held Zulfikar Ali Bhutto’s nationalisation policy responsible. Mr Shahid Javed Burki is one contributor to this line of thinking, not realising that proffering “soft alibis” is not only music to the ears of our business leaders but masks the real cause behind the lacklustre performance of the corporate sector.This article tries to put the nationalisation policies of the Bhutto era in a proper perspective and delineates the real reasons behind the prevailing malaise in the corporate sector. It is particularly important to set the record straight since the Indian experience confirms that despite nationalisation in India and a large public sector, the corporate sector has continued to march forward. It is natural, therefore, to ask why the position is different in Pakistan.According to conventional wisdom, private sector management is inherently superior to public sector management. However, there is little empirical evidence to support the veracity of this hypothesis in Pakistan.A brief survey of the corporate landscape in Pakistan reveals that while the banking sector does, indeed, represent a successful transformation triggered primarily by change of management from public to private sector through privatisation, other corporate achievers like PSO, PARCO, OGDC and the two Suis are all in the public sector as was the National Refinery till recently.It is also important to look at the post-privatisation performance of privatised enterprises. Performance of privatised banks supports this hypothesis, as does the post-privatisation performance of Millat Tractors, Balochistan Wheels and D.G. Khan Cement.At the same time, there are countless examples of units showing deteriorating performance in the post-privatisation phase. These include Bankers’ Equity, Zeal Pak Cement, Ghandhara Industries, Pakistan PVC and Sind Alkalis, not to mention others shut down after privatisation.Another common fallacy explaining poor corporate performance is that nationalisation retarded the development of managerial and technical skills. A serious examination reveals that nationalisation, in fact, enlarged the pool of professional managers.The most significant aspect of nationalisation during the 1972 to 1974 period was the clear strategy to take over ownership control but not the management of nationalised industries. In that early phase, nationalisation did not imply the replacement of professional managers by bureaucratic nominees.As a deliberate policy, the first step after nationalisation was to replace the owner chief executives by the senior-most professional managers in the nationalised enterprise. Serious efforts were also made to induct outstanding professionals and distinguished entrepreneurs in senior management level positions.This strategy generated a huge reservoir of commitment and enthusiasm from professional management. As a consequence, there was a turnaround in performance in nationalised units with peak levels attained in 1974-1975. Since then, there was a gradual but perceptible deterioration not only because of whimsical changes in key personnel but more importantly because of the failure of the administrative structure (ministry of production/BIM) to effectively monitor performance and evaluate outcomes linking these to an appropriate incentive system.Despite this environment, some public sector-managed enterprises continued to perform well because of the individual chief executive’s commitment and integrity. At the same time, however, even the best of professional managers under public sector management continued to be victims of policy imperatives.Let us analyse the nature of manufacturing enterprises nationalised in 1972. These were largely modest in size and in operations. Another common feature was the near absence of professional management. Even in the case of the National Refinery, owing to product monopoly, no need was felt for establishing any marketing platform. In the automobile sector, companies were largely assembly operations. In other sectors — cement, light engineering and chemicals — the manufacturing processes were simple and there were few marketing challenges, given a captive local market and high tariff barriers against imports.In terms of financial performance, some of the companies had done well, but principally on account of very high tariff protection, subsidised raw material prices, tax incentives and near-oligopolistic positions. Financial performance, therefore, was not a reflection of entrepreneurial ability or managerial skill.With import substitution as the mantra of Ayub Khan’s policies and the “bonus voucher scheme” providing the facilitating mechanism, many of these industries continued to make financial profits even while operating considerably below the optimum capacity utilisation.While many economists continue to wax lyrical about Pakistan’s industrial success during the Ayub era, there seems to be reluctance on their part to reflect on the benefits of that era to the country. When evaluated against revenue generated for the government in terms of taxes, benefits for the workers in terms of wages and working conditions and benefits to minority shareholders in terms of distribution of dividends, the so-called golden decade of the 1960s does not show a pretty picture.It follows, therefore, that beyond ideological commitment, the government of Zulfikar Ali Bhutto had practical reasons to consider nationalisation as a viable option for a transformation of the industrial base of the country.The broad objectives of nationalisation of his government included introduction of professional management, enhancement of local value addition and control on prices. Let us examine the extent to which these objectives were achieved.The demand for professional management increased with nationalisation and this was met both through in-house training as well as by public sector institutions. There was a conscious effort at increasing local value addition. Prices were also kept in check as evidenced by price stability over a long period in at least two commodities: cement and vegetable ghee. The other societal benefits included increased revenue for the exchequer and better working conditions for labour. No, nationalisation was not the unmitigated disaster that Mr Burki and others make it out to be.It is important to identify the underlying causes for the stunted growth of our corporate sector. The underlying causes are easier to identify if we focus on one important sector — textile — which never faced the sword of nationalisation. This sector, in which Pakistan enjoys an inherent comparative advantage, has been the most favoured child of the state throughout our history. It has been showered with a wide range of “concessions” including low import duty on machinery, high levels of protection against import of textile products, area-specific income tax exemption and concessional project financing.Yet, the textile sector is crying out for more state crutches to compete internationally. Reared on subsidised raw cotton and created through state licensing mechanism and surviving on concessions, there has never been any incentive for the sector to grow and compete with “adults”.The textile business is cyclical in nature. Consequently, there are good years and bad years. In good years, surplus profits are set aside and partially invested in upgradation for enhancing productivity and efficiency so that in lean years businesses can live with lower margins.In Pakistan, the pattern has been very different. Surplus profits during good years have neither been distributed to shareholders, nor retained in businesses, nor used for upgradation or modernisation. They have either been stashed away out of the country or wasted on conspicuous consumption.During the bad years, there has been a familiar stampede in running to catch hold of the coat-tails of the government and pleading for more concessions. The most frequently used tactic is the threat of large-scale shutdown of manufacturing units. The state has been more than accommodating in responding to these distress calls. In 2006 alone, the loan write-offs and other forms of financial relief by the five largest banks (NBP, HBL, MCB, UBL, ABL) to textile companies aggregate to over six billion rupees.The sector is in crises yet again and the government is reportedly putting together yet another “concession package”. These are not likely to redress the fundamental structural problems. The sector is segmented with a large number of units of small size, lacking managerial capacity and marketing infrastructure, poor quality control and absence of the requisite skill sets among production workers. It is in the aforesaid areas where we have slipped sharply against international competitors.Unfortunately, there are no easy or quick solutions. Any effective turnaround would require a fundamental change in the mindset of textile magnates. They need to transform from a rentier class to one of entrepreneurs. Only then can they come to terms with the permanent change in the global trading paradigm in the post-MFA, post-WTO environment.The corporate leaders in India were not born in a day. They have been reared on the tradition of pursuing entrepreneurial flair, a high propensity to re-invest and to expand and diversify. The ramifications of globalisation were fully understood and the corporate sector was adequately geared to maximise opportunities. This confidence was based on the large size of individual corporate groups and the availability of a large pool of managerial manpower. It was, thus, only a matter of time before Indian corporates acquired a global status.Pakistan, on the other hand, both at the government and private sector level, has been far less prepared. This is the principal reason why we face this dilemma.Is there hope of a transformation? Sadly not. Our corporate sector has neither the vision nor is attuned to performing the role of entrepreneurs while lacking the requisite managerial and technical manpower that could enable us to graduate from a commodity producer and exporter to a producer and exporter of specialised products. There is hardly any other sector where the scale of operations or the level of technology can place Pakistan in the same league as India.It is not that we were destined to fall by the wayside. The private sector has consciously chosen to shy away from preparing itself to prosper in a competitive environment while the government has failed to create the human resource platform — an essential element of the enabling environment.The writer is chief executive of a financial sector company in Lahore.
posted by India News Watch at 5:57 AM
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