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To privatise or not

March 27, 2016


SHOULD PIA, a state-owned enterprise be privatised? It is poorly run, losing a great deal of money, and a drain on the budget. But what does that have to do with PIA being a SOE? Therein lies the real question and some answers to our particular predicament.

If one were to line up all potential services with the smallest in scale at one end to the biggest at the other, readers would likely agree that the smallest (say, tea stalls at a railway station) are better provided privately and the largest (say, national defence) by the public sector. The reasons are not hard to fathom. Bureaucracies are not good at adapting to rapid changes in market conditions and consumer preferences; markets cannot exclude those unwilling to pay for a service like national defence.

In between these two extremes, almost all services beyond a minimum scale can be provided equally well by both public and private sectors. Ownership matters less than arrangements for management. It might surprise some that the most efficient utilities in the world are in Singapore, all operated by SOEs.

The example of airlines itself proves the point. Readers can easily look up public and private airlines that are equally successful. In fact, if PIA were sold it would most likely be to one of the state-owned Middle East airlines demolishing immediately the argument that an airline cannot be run efficiently by the public sector.

This should bring us to the crux of the issue: it is not that an airline cannot be run efficiently by the state; what is being implied is that it cannot be run by the state in Pakistan. This should immediately raise the question WHY? Why is the Pakistani state unable to run an airline efficiently?

Some of the most efficient utilities are operated by SOEs.

Here one should not be distracted by the argument that has become the implicit rationale for privatisation of SOEs in Pakistan — that the public sector is dishonest. This is an invalid basis for deciding how a service is to be provided.

One cannot legitimately compare the reality of one sector with the ideal of another. The private sector has an equal share of dishonesty, from the local milkman who mixes water in milk to the pharmaceutical companies marketing adulterated drugs, to the global corporations regularly charged with fraud.

This opens up a set of issues. Once the airline is privatised what would be our position on the provision of ancillary services like airport facilities and traffic control and allocation of routes? Wouldn’t these also need to be privatised because otherwise they would remain in incompetent hands and negatively affect the efficiency of the privatised airline?

And if our governments are actually dishonest or incompetent, or both, as alleged, how can we be sure that they would be honest or competent in the process of privatising a SOE? Isn’t it a fact that almost every attempt at privatisation in Pakistan has been dogged by scams? How wisely would it use the proceeds?

We also know that all services involving human safety need to be regulated. How can we expect a dishonest, incompetent state to regulate efficiently when it is not able to operate efficiently? Wouldn’t powerful private interests subvert the regulatory apparatus to further their interests just as private firms buy out state agents to jigger their electricity bills? Should regulation also be privatised?

We reach a dead end if there are no credible answers to these questions. The logical implications of using the argument of state dishonesty and incompetence for privatisation are momentous leading straight to the conclusion, absurd as it might sound, that the state itself ought to be privatised. It would be much more efficient to give the management of Pakistan to the state of Singapore.

Having identified the big question at issue we can return to the relatively minor one of PIA. Airlines operate in a market open to competition and therefore the service can be offered privately without difficulty. Networked services like railways, electricity, gas, and water, on the other hand, are natural monopolies and much more difficult to privatise although examples exist where this has been managed.

At the level of pure theory and in an ideal world, the private sector maximises profits within a set of externally imposed rules that prevent it from cheating; the public sector maximises public welfare at least cost in a framework of accountability that prevents it from abuse of power.

Without honest regulation and public accountability neither sector will deliver — we are at best indulging in a second-order debate. Even if PIA is privatised, the state will retain control over huge assets that it would continue to mismanage. The problem that motivated the privatisation of PIA will not go away unless we face up to the real conundrum of the incompetent state and do something about it.

The writers are economists.

Published in Dawn, March 27th, 2016