The ultimate challenge
Jhis article is not about sovereign states, political parties, celebrities and other boring stuff. It’s about business turnaround. It is relevant for Pakistan because almost 70% of public enterprises are underperforming. In the private sector, the “illness ratio” is not so high, but high enough to cause concern.
The most relevant quote on the academic subject is that of Gujrat’s famous “Choudhry” “Mitti Pauw, agea chalo” – “bury the problem – move on”. Totally inappropriate for the corporate sector. Early in my career, when I worked for ICI, one afternoon as my car entered the front door, a gust of wind blew through the door, knocking it against the back. Not much damage. Nevertheless, a detailed report had to be filed.
The story goes that in 1974 Prime Minister Zulfikar Ali Bhutto signed a report regarding the crash/write-off of a PAF F-86 Saber Jet. In accordance with standard operating procedures, the report was 20 pages. The PM had to read and sign each page. It took him 45 minutes. Now, if a PIA plane crashes at Drigh Road Colony Karachi, the matter is quietly buried. The fact that a lot of people died, it doesn’t matter. At the end of the day, many people claim to be “rollback” professionals. Not true. It is a rare skill.
Institutionally, the only organization that acquired this technical expertise was the National Development Finance Corporation (NDFC) through interaction with the International Bank for Reconstruction and Development (IBRD), the Asian Development Bank (ADB), the International Finance Corporation (IFC), etc. Even the two main regulators, the State Bank of Pakistan (SBP) and the Securities and Exchange Commission of Pakistan (SECP) are lacking; hence the mess.
“Business failure” is a rather democratic malaise. It can attack any industry in any country. Like Covid-19, this goes for vulnerable points. Once a “corporate takeover” is underway, whether it is a public enterprise (SOE), a private company or a multinational, many disciplines come into play – finance, legal, HR/staffing, technology, local laws, etc.
In the United States, home to many Fortune 500 companies, there is a continuous flow – right/downsizing, creative destruction, startups, unicorns, mergers and acquisitions, spin-offs. It’s not for the faint hearted.
Activist investors like Carl Icahn and Boone Pickens can give sleepless nights. The iconic company, KODAK, is no more. Remember the “Kodak moment”. Monsanto has grown from a chemical company to one of the most powerful corporations in the world – now influencing the world’s food supply via GM seeds.
The consultancy and consultancy work generated by all this activity is a huge, huge industry. McKinsey & Co is a powerhouse. It is considered a stepping stone to the best CEO positions. They also run a super-secret investment fund that is not open to ordinary investors.
Japanese business culture is different. The bankruptcy of a company is considered a national calamity to be avoided at all costs. Cross-shareholdings discourage any “Anglo-Saxon” shifts. The Japanese business class did not like Mr. Ghosn of the combined Renault/Nissan/Mitsubishi group. Mr. Ghosn met the fate of a samurai.
Europe is more relaxed than the US when it comes to business turnaround. In the Catholic South, state-owned companies can drift for decades, unquestioningly. Greece is an example. As long as they (southern Europe) have their coffee breaks and vacations, they don’t want a change.
The conflict in Ukraine will shake things up on a global scale, but particularly in Pakistan, a business failure can have the following repercussions:
* Banks take a hit – NPL’s mount
* National security may be compromised
* Job losses
* FDI and local investments may decline
In Pakistan, the following emerged as the main cause of business failure (no detailed analysis was ever undertaken):
Pakistan is without development
Financial Institution (DFI)
NDFC, Pakistan Industrial Credit and Investment Corporation and BEL disappeared.
The IDBF is awaiting a legal justification for the closure. In their heyday, these DFIs were the focal point of industrial finance. Slowly, mismanagement and corruption overtook them. The planned commercial bank fared no better. Huge losses, huge write-offs. The National Bank of Pakistan (NBP) could be ranked as the most incompetent bank in history. Despite some renowned presidents/CEOs.
Weak monitoring and supervision
The two main regulators, the SBP and the SECP have not played the desired role. Neither does the board of banks/DFIs. The current failure of ‘Hascol’ is a good example. Will there be accountability and will corrective action be taken? Probably not. Have SBP and SECP developed case studies on the failure of Hascol, Mehran Bank, Indus Bank, Summit Bank, Bella Chemicals, Frontier Ceramics and dozens of other industrial and commercial companies? The numerous business schools in Pakistan, which should host such industrial failure reports/analysis, are largely ignorant of the subject. I may be a dud, but no business school has a tutorial/course similar to business turnaround.
Bad evaluation of the project
The feasibility of the project must be subject to rigorous analysis – financial, economic, technical, marketing, managerial, etc. In the past, DFIs attempted to do this. Today, only commercial banks are involved in project financing. They don’t have the expertise.
Technology makes industry segments redundant. At an unimaginable pace. From vinyl records to tape recorders to accompany men to CDs, cell phones and streaming services. Mind-boggling. This happens in every industry imaginable. Fortunately, Pakistan, at the bottom of the chain, was spared too many technical disruptions. But the impact is predominant.
Labor law / trade unions
These unions are fundamentally against corporate recovery. Turnaround means job losses – downsizing or downsizing. When such efforts are contemplated, labor laws come into play with political parties. There have been 30 years of deployment on the issues that beset PIA. I can only add that along with other stakeholders, the Pakistan Airline Pilots Association (PALPA) is guilty of the problems that PIA is besieged with. As a powerful union, PALPA could have stopped the malice. But they preferred to go there to protect their privileges. Similar is the case with steel mills in Pakistan.
A few years ago, while visiting PSM, I walked into one of the large production halls around noon. Workers slept on the floor, others read newspapers, had lunch, played cards, talked on their cell phones. An exemplary industrial environment. There is no hope for the above two projects, and many other projects. As I wrote much earlier, PIA should be sold for a single Rupee (Rs1) including assets and liabilities.
– The writer is a former executive director of Pakistan Management Association