Pakistan Institute of Development Economics



The Profitability of Public Enterprises in Pakistan

The importance of the profitability of public enterprise for capital expansion and development has been highlighted in various studies, e.g. in (2], [4] and (5). In Pakistan the increasing role of the public sector in resource mobilization points to the need for analysing public enterprise profitability because of its immense importance for capital financing and growth. This paper analyses the profitability of public enterprises in Pakistan using a Ratio analysis methodology which chooses performance indicators on the basis of their sensitivity to the operational health of the enterprises. The profitability ratios discussed here have been derived from the public-enterprise balance-sheets [9] and constitute the choice-set from which four ratios have been selected on the basis of their predictive power. (See [I], [3], [8] and [10].) In this way, the arbitrariness involved in the choice of the appropriate ratios for analysing enterprise profitability is overcome, even though profitability measurement may still be distorted to such an extent that effective prices diverge from opportunity costs. This makes the task of performance evaluation difficult as such an exercise has to take into account the implications of market distortions. The usefulness of profitability as an indicator of relative inter-firm performance is therefore limited by the fact that prices are administered with reference to products and are not tied to firm experience. But, owing to the lack of data on the required variables, the effect of market distortions on profitability is difficult to analyse.

Khwaja Sarmad

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