Article for August 3, 2010

Public sector enterprises By Dr. Ashfaque H. Khan

While presenting the budget 2010-11, Finance Minister Dr. Abdul Hafeez Shaikh pointed out that Pakistans public sector enterprises (PSEs) are not only inefficient, poorly managed and bleeding profusely but are burden to the national exchequer as well. The eight PSEs such as PEPCO, PIA, Railways, Pakistan Steel, NHA, PASSCO, TCP and Utility Stores have costed Rs.245 billion to the budget 2009-10 with PEPCO alone contributing around Rs.180 billion. All other entities cost the national exchequer a sum of Rs.65 billion in 2009-10. Such a colossal loss is a drain to national resources, it destabilizes budget and adds to the national debt. Can a poor country like Pakistan afford to pay Rs.245 billion from the budget to keep these institutions floating? How long the budget will allow the government to continue to finance inefficiencies of these poorly managed institutions? Last year the government paid Rs.245 billion from the budget. This year it is expected to increase further and will continue to rise going forward. Should we continue to bail these institutions out year-in-year-out? Finance Minister has committed himself before the Parliament to restructure these eight PSEs in 2010-11. A restructuring plan in line with best global practices has been approved by the Cabinet, the salient features of which include the setting up a professional board of directors for each entity fully empowered to appoint chief executive officer of the respective PSE. Will restructuring succeed in a political atmosphere where leadership is dependent on classic patronage? Or will this be a waste of resources and time? Should we take the route of outright privatization and save billions of rupees of the taxpayers money to be utilized for providing basic infrastructure needed by the economy and society? When government tries to do what the private sector can do as well or better, the states managerial and financial resources are diverted from essential services that only the state can provide equitably to all its citizens good education, health, roads, telecommunication, and electricity among others. After the independence the country wanted to exercise its newly found sovereignty but this would not have completed without having control over the economy. The statedirected industrialization was thought to be a solution to develop the country at a much faster pace than under a market-driven private sector-led system. Private sector was considered weak at the early stages of development. PSEs participated effectively in economic development through capital formation, generating employment, providing infrastructural facilities, raising finances and paying taxes. The PSEs, therefore played an important role in the economic development of the country at the initial stage. However, with the passage of time these enterprises failed to keep themselves abreast with the rising economic activities. Government monopolies whose workers enjoyed absolute job security turned out to be unproductive. PSEs knew that they could not go bankrupt, turned out to be making

staggering losses which the taxpayers had to bailout. PSEs knew that they did not have to face competition, turned out to be fleecing their hapless customers. And money spent on running steel mill, airline, hotel, grocery, trading was not available for basic infrastructure of the economy. A political reality characterized by strong patron-client relationship in Pakistan found it exceedingly difficult to administer a vast public sector without it being used for the patronage that party workers expected and demanded from their leaders. As a result, the PSEs became hugely overstaffed as leader after leader sought to provide jobs for the boys. The political elite have used these PSEs systematically as a patronage tool to fortify their power base. Obviously they are against to give it up now. The workers in the PSEs have enjoyed job security, relatively decent pay and very little pressure to perform. Obviously they will be reluctant to give this up. The political leadership, professed to care for the lot of the poor, is against restructuring and privatization and defends the status quo. Such a stance is manifestly anti-poor. The eight PSEs are bleeding; they have outlived their usefulness and instead of contributing to the national economy they have in fact become a burden to the national exchequer. They have been exempted from the discipline of the market as well as public authority; though they count on the government to provide guarantee to back their creditworthiness, thus causing contingent liabilities to soar. The issue at hand is the financial viability of these PSEs. Can they survive without budgetary support? How long the government continues to inject money to keep these bleeding institutions afloat? Does it make sense to add thousands of workers in already bankrupt institutions? Is it economics or brutal politics? Should we continue to oppose restructuring and privatization? Will status quo work in a financially starved country? The answers to all these questions are in negative. Pakistans financial health is not in a position to support these bleeding institutions any more. Pakistan needs resources for educating its people; providing them health care, safe drinking water, roads, highways, electricity and security. Rs.245 billion per annum is sufficient to provide these facilities. Let these resources be diverted to improve the living standards of the millions of voiceless Pakistanis. Is restructuring a solution for these PSEs? My experience suggests that it is a waste of time and resources. Institutions like Railways, PIA, Steel Mill and WAPDA have been restructured many times in the past but they are still bleeding profusely. Simply changing the face at the top will not make them financially viable. The board and the CEO cannot transform the loss making institutions into profitable ones. The only solution is the privatization of these institutions without wasting time and money; even these are sold in just one rupee each. At least this will save more than Rs.245 billion every year which can be spent on voiceless millions. The writer is director general and dean at NUST Business School, Islamabad. Email: ahkhan@nbs.edu.pk