March Issue 2016
The Social Contract
Governments in poor countries, especially those which are totally dependent on imported fuel, need to be necessarily business-minded to be able to not only rationalise the dependence, but also reduce the burden on their import bill by being experts at trading on the international oil market.
Donor-driven poor countries need business-minded governments even more because if they are not well versed in what is happening in international trade, more likely than not they are going to end up returning almost the entire aid back to the donor country in import bills, consultation fee and shipping charges. So, let us not buy with eyes closed the dubious rhetoric of economic undergraduates that it is not the business of governments to be in business.
It is only a business-minded government which can make a distinction between an enterprise that yields profits of immense social value and those that yield purely financial profits.
Take for instance, the Steel Mills. No matter how you run it, at a production capacity of 1.1 million metric tonnes it can never be financially profitable even if you cut its fat to bare bones. It can become profitable only if its capacity is expanded to three million tonnes, which the original plan for the mills had envisaged. Its current social value is too dubious to merit any consideration. So sell it today even if it brings in only one dollar (the land in its possession should, however, be sold at market rates) because every passing day will only add to its losses and increase the burden on the national budget.
However, this will never be true for PIA, Pakistan Railways, power generation and distribution entities, Oil and Gas Development Company Limited, Pakistan State Oil, utility stores, National Bank of Pakistan, Civil Aviation Authority, Pakistan National Shipping Corporation, Karachi Port Trust and Port Qasim, etc. In rich countries, perhaps, these entities would be better off in the private sector. But in poor countries like Pakistan such entities, if given to the private sector, will end up catering only to a handful of the rich.
A government without business know-how will rarely be able to maximise the social benefits of a public sector entity at a minimum financial cost. In most developed societies, this is done by letting the public sector compete with the private sector but with keeping the latter’s profit motive within reasonable bounds by establishing legally-sound autonomous statutory regulatory mechanisms. We don’t have such regulatory bodies.
And if such mechanisms are developed, air, road and rail transport, energy-related units, public schools and public health institutions, at least up to primary level, would need to be kept under government control, no matter how much the cost.
A big chunk of the unnecessary financial losses that these public sector entities are incurring currently can be eliminated by cutting down on waste and replacing inefficient management with efficient ones. Also, their burden on the budget could be significantly eased if the government were to collect the taxes that are due to it from all citizens who earn taxable incomes. Only a business-minded government would know the importance of enforcing tax laws strictly across the board without exception and exemption.
PIA is our strategic asset. It was highly profitable when oil was being imported at two dollars a barrel and when you could buy a dollar for four rupees. Also, all through the 1970s and right up to around the early 1990s, PIA had a monopoly in the regional market west and north of Pakistan. With the oil boom opening up employment opportunities in the oil-rich Middle East countries and the Gulf, PIA was the main carrier of workers from Asia and the Far East to and from the work place. It was only when we went for an open skies policy and sold even our domestic routes and foreign landing rights to the well-heeled Gulf airlines that PIA started going into the red financially. But its social value never lost its lustre.
Indeed, had it not been for the Orient Airways and subsequently PIA, the two wings of Pakistan divided by almost a thousand miles of hostile territory, would have gone their separate ways from the very inception of the country. In fact, once the air link was snapped between the two wings by the middle of 1971, it did not take long for the final cut-off, notwithstanding the self-perceived stronger bond of faith. In the first three decades of its operations, it had become the most prolific of Pakistan’s job-generating enterprises. It had also served as the only link until about the 1980s between the world and China.
And during the period when it was being managed by the late Air Marshal Nur Khan and then Air Marshal Asghar Khan, PIA was literally a company of ‘Great people to fly with.’ Even today it provides the only link between the national mainstream and the remote corners of the country.
Of course, not everything of social value will be profitable and not everything that is profitable will be of social value. And to quote from an article, “Why governments should not be run like a business,” by John T Harvey inLeadership, a Forbes publication: “Reality TV, fashion shows and sports are all of questionable social value, but each is quite profitable and exists in the private sector. Meanwhile, few would argue that the army, navy, air force, marine corps, coast guard, police department, fire department, libraries, parks and public schools are of no social value, and yet, they could not exist if they were required to be profitable.”
Using an outdated colonial law to suppress a democratically legitimate right to protest by PIA employees that cost a number of valuable lives needs to be condemned in the strongest of terms. Pakistan would do well to learn from the way its economically more advanced neighbour, India, has been handling such situations rather than put all its eggs in the IMF’s one-size-fits-all formula of austerity that has only increased its dependence on dole.
It is said that the burden of wages on PIA’s budget is no more than 10-13 per cent. The problem is said to be its declining revenues, caused by the dwindling of its fleet and the subsequent loss of routes to competition from Gulf airlines. Also, over the last decade there have been quick changes at the top several times. Every new chief executive is said to have brought with him his own team at very high salaries, sending the incumbents to a surplus pool with their salaries and perks intact. This is said to have continuously added to the cost of maintaining the top heavy but inefficient management.
According to the Vice Chancellor of Pakistan Institute of Development Economics, Dr Asad Zaman, (Don’t privatise PIA, improve its governance, The Express Tribune, Feb 15, 2016) while there have been successful privatisations elsewhere, the Pakistani record is dismal. He says, “Here, ‘privatisation’ is actually an asset sale at throwaway prices. To enable such sales, the government not only takes over all liabilities, but covers many types of business risks, essentially guaranteeing enormous profits to the buyers. This misunderstanding is reflected in the corpses of many privatised state-owned enterprises (SOEs), which were stripped of their assets and left to rot. For this reason, the list of failures, and mega-failures, of privatisation both within Pakistan and globally, is endless.
“Since PIA is an SOE, regardless of whether or not it is privatised, the debt burden is the responsibility of the government. PIA does not have insurmountable structural problems. There is enough dynamism, initiative and know-how in the current and past staff of the PIA that if they were given a clean slate and an opportunity to run the company, they could operate it efficiently. Pakistan is also blessed with many world-class business leaders who have the desire to serve their country and have excellent management skills. With vision and support from the government, an appropriate team could put together a turnaround plan in short order. We must erase the debt burden to allow for a fresh start, and also make radical management reforms. If it is necessary to pander to the IMF, an employee buyout would certainly be superior to selling to mysterious companies recently incorporated in Nairobi, whose payment cheques bounce. Growth depends on building and strengthening institutions, both public and private. Imagine the consequences if we were to sell all inefficient ministries to foreigners.”
This article was originally published in Newsline’s March 2016 issue.