Expert discusses China’s SOE Governance, competition, and innovation lessons for Pakistan

A few days ago, H.E. Jiang Zaidong, ambassador of the People’s Republic of China, held a consultation with a diverse group of individuals. He briefed the audience on various issues, focusing on President Zardari’s visit to China and the bilateral relationship between China and Pakistan. He began by stating that the relationship is rock-solid; regardless of the circumstances, China and Pakistan will continue to work together. He noted that this year, we will celebrate 10 years since President Xi’s visit and prepare to rejoice in the 75th anniversary of our bilateral relationship.

A distinguishing feature of our relationship is that it is guided by top leadership with sincere efforts and a positive mindset. The relationship has entered a new phase of jointly building a closer Community of Shared Future because President Xi and Pakistani leaders have renewed China-Pakistan relations’ positioning in the new era, making the two countries the world’s first all-weather strategic cooperative partners.

He categorically mentioned that President Zardari’s visit to China was a success. He said,” President Xi Jinping has stated that China is ready to walk hand in hand with Pakistan on our respective paths to modernization and welcomes Pakistan to become one of the first countries to benefit from China’s further deepening of reform comprehensively and expanding high-standard opening up. China is ready to deepen practical cooperation with Pakistan in various fields, work together to upgrade CPEC cooperation, and help Pakistan consolidate its development foundations and unleash its development potential. We’ll accelerate the construction of model Special Economic Zones (SEZs), attract more export-oriented enterprises, explore cooperation in emerging fields such as artificial intelligence (AI), develop cross-border E-commerce collaborations, and welcome third-party participation in CPEC cooperation to better harness the potential of B2B collaborations.

He also highlighted that President Xi Jinping emphasized that security is the prerequisite for development, and development is the guarantee for security. Security cooperation and economic cooperation are complementary, and like both wheels of a bicycle, they should advance together. He concluded by saying we must aim high and take a practical approach to implement the agreed cooperation areas.

The briefing revealed that, contrary to propaganda, Pakistan and China are collaborating to enhance their relationship. They aim to diversify further and explore new areas of cooperation. This presents a significant opportunity for Pakistan to identify new avenues for cooperation that can facilitate economic recovery and development.

In this context, one proposal is that Pakistan should propose to China to build a new corridor under the CPEC, the State-owned Enterprises Corridor (SOEs-C). SOEs-C has economic, social, and development rationales.

It can help Pakistan address its fundamental issues with state-owned enterprises (SOEs). Currently, many SOEs are operating at a loss, requiring Pakistan to provide subsidies to sustain them. Their poor performance stems from bad governance, political interference, and a lack of economic insight. The ruling elite have utilized SOEs as tools to secure loyalty, votes, and power. Consequently, successive governments have exploited SOEs to garner support and benefit their associates. They hired individuals in large numbers without a need assessment. The executive management, generally handpicked, often lacked a sound understanding of business. Bureaucrats and military officers with little or no grasp of business dynamics were appointed. They were unable to formulate economic strategies to manage these organizations.

It served a dual purpose for the ruling elite. First, the loyalty was bought. The executives facilitated the ruling elite to run the SOEs according to the political preferences of the ruling elite. They kept on hiring people, whether they needed it or not. It led to crossing the threshold of SOEs’ carrying capacity, bringing them to their knees and the most prominent example is PIA. Second, the ruling elite established personal businesses and is running without competition. Subsequently, the SOEs turned into loss-making entities, and the government had to provide subsidies.

Unfortunately, instead of addressing the problems, the ruling elite started to promote IMF and World Bank ideology to privatize SOEs without recognizing the importance of these enterprises. They need to grasp that states cannot be sustained solely on tax revenue. The State also requires non-tax sources, and SOEs are the biggest source. Relying only on tax income will not suffice as state expenditures grow with the increasing population. The demands of the public services also rise over time. Dependence on tax revenue alone forces states to raise taxes on everyday products and private sectors. This leads to a dual problem: on the one hand, inflation rises, and on the other, the private sector begins to lose its competitive edge in the global market and badly impacts exports. Ultimately, it leads to unsustainable borrowing.

Therefore, instead of privatizing SOEs, Pakistan should look for alternatives and avenues to revive them. The analysis of the current situation indicates that Pakistan can explore options with China, as China has the best SOEs in the world. It is suggested that Pakistan should propose a State-Owned Enterprises Corridor (SOEs-C) under CPEC. The SOEs-C operate by creating joint ventures among Pakistani and Chinese SOEs. I believe that the SOEs-C corridor under CPEC can help Pakistan transform its SOEs into profit-making enterprises.

However, for that purpose, Pakistan will have to devise a wise and stepwise policy. Pakistan should start by analyzing the success of Chinese SOEs and drawing lessons. A bird’s-eye view suggests that Chinese SOEs have the following lessons:

First, governance is key to success. Chinese SOEs employ modern governance models that reduce political interference. The CPC supported merit, not political appointments.

Second, China manages its SOEs according to market principles. China introduced competition among SOEs and ensured they had no comfort zone other than competition. For example, China Mobile, China Telecom, and China Unicom all have to compete among themselves for better services and have to prove their worth and justification for existence.

Third, the CPC and Chinese government pushed SOEs to invest in R&D to lead innovation. Now, SOEs are at the forefront of innovation, setting new standards for work and development. They have very advanced and modern means of production and delivery. For example, China Railway is leading the world in creating new infrastructure, building new train models, and enhancing efficiency.

Fourth, China asked SOEs to compete globally and acquire a place among the top Fortune 500 companies. As a result, they have an extensive market network worldwide.

On the contrary, Pakistani SOEs face challenges in all these areas. Thus, joint ventures under SOEs-C will enable Pakistan to learn from Chinese SOEs. They will also assist Pakistan in building the capacity of SOEs and State institutes to run them and make them profit-earning entities.

In conclusion, I believe China will be happy to assist Pakistan, as China has already helped Pakistan many times in diverse fields to build Pakistan’s capacity, including in the defense industry. For example, China helped Pakistan establish the Heavy Mechanical Complex (HMC) Taxila, Al-Khalid Tank, and the most recent example is the joint production of F-17 Thunder. Thus, if China can help Pakistan in such areas, it would be easier for it to help revive SOEs and turn them into productive resources without burden. However, to make it successful, Pakistan will have to devise an economic rationale. There should be no run-of-the-mill presentation.