Choking on the family silver

July 21, 2018

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REGARDLESS of Wednesday’s outcome, Pakistan’s most troublesome state-owned enterprises (SOEs) will likely remain state-owned for the foreseeable future. Thus, concerned citizens will continue to agonise every year, over poor results from the likes of PIA, and the Pakistan Steel Mills, sharing hackneyed tales from the ‘glory day’ ad nauseam.

If the main contenders have any novel ideas for the ‘family silver’, they are hiding them well. And the broader question of how the state should assess which of its nearly 200 businesses should be retained, and which shouldn’t be, remains unaddressed. Without a clear view of why to keep or let go of particular companies, any plan is likely to fail.

Superficially, the main party manifestos do mention plans for SOEs. For this, the people of Pakistan, on the hook for over $10 billion worth of debt racked up by the biggest losers, can be thankful.

The PTI’s plan sounds new but isn’t. The word ‘privatisation’, does not appear once in their manifesto. Instead, they envisage a sovereign wealth fund, to which ownership of all SOEs will be transferred. This sleight of hand aims to separate management from line ministries, following which the PTI wizards will make merit-based appointments, and nurse these companies to profitability.

Pakistan has heard it all before. The graveyard of ideas for SOEs is littered with hot-shot CEOs and clever turnaround strategies. Testing the hypothesis that an entity owned by the federation could manage itself, completely independent of politicians, bureaucrats and hyperactive judges, could be a costly experiment indeed.

Without a clear view of why to keep or let go of particular companies, any plan is likely to fail.

The PTI’s proposal generates more questions than answers. How would overstaffed companies fire workers? Would companies in unattractive markets be able to sell their assets and cease business? Would the fund ever sell companies? And, perhaps the most important question for the PTI team — to borrow from a Punjabi film — ‘Soneyo, navain aye o’? (Darling, are you new here?)

If the PTI’s ‘wealth-fund’ is a word trick, the PPP lacks even that. Opposed to privatisation, it promises a ‘People’s Reform Programme’, to make loss-making SOEs profitable. How? Among other banalities, by “ensuring efficiency increases”, and by bringing about “changes in management culture”. Enough said.

The PML-N should be the odd one out. Denationalisation is a long-standing pillar of its ideology. It’s 2013 manifesto boldly promised that all the big loss-makers would be transformed and/or sold. And what did they accomplish? Selling government stakes in three profitable banks and an oil company. Their 2018 manifesto is a more modest mish-mash of plans, to improve management at some entities, continue to ‘review’ others, and privatise some.

So, two of the three contenders oppose privatisation entirely, and the third couldn’t make progress despite a majority in parliament.

To boot, none of them have articulated a philosophy in the matter. To the extent that they differentiate at all between the various SOEs, such differentiation is not based on maximising social welfare.

This approach flies in the face of mainstream economic theory.

The conventional wisdom is synthesised well by Dr Talis J. Putnins, in his paper, ‘Economics of State-Owned Enterprises’ (International Journal of Public Administration, 9/2015). Dr Putnins’ framework begins with the widely held premise that the state should only consider conducting business in areas where free markets fail to do so effectively. Even in such cases, the state should consider if subsidies or regulation can address failures before engaging directly.

To illustrate this, consider a common market failure, an ‘externality’, and how it might apply to PIA. If a product or service has benefits or detriments to society, that aren’t captured in its market price, it is said to have positive or negative externalities. An airline might lose money transporting passengers to Skardu from Islamabad, but the economy might benefit greatly from the resultant tourism boost. That’s a positive externality. It was also the model for Emirates Airlines for years.

Similarly, PIA’s recently suspended New York route may well have been loss-making. But if being connected directly to New York leads to investors viewing Pakistan more favourably as an investment destination, that’s a positive externality. Economic literature substantiates the positive externalities of air links, especially for high-tech and service-oriented industries. If PIA’s routes were all designed to optimise for externalities, the $300 million or so that it loses annually might even be worth it.

Continuing this thought process, there are other ways to achieve direct travel links, for example, through subsidies to a privately-owned PIA. But a common idea about PIA, that we should restrict competition from foreign carriers, to restore PIA’s financial profitability is absurd. This would reduce social welfare, which should be the yardstick for SOEs. We need more connections, not less, even if that means PIA can’t make a profit.

To illustrate the opposite, consider Pakistan Steel Mills. It is hard to justify using 16,000-plus acres of peri-urban land to house this monstrosity. Reliant on imported raw materials, far from local coal deposits, unable to compete even domestically, it is only fitting that the country that helped build the mill (Soviet Union), itself shut down. Calculating any positive externalities that could be generated by an enterprise producing a perfectly competitive, easily traded, commodity is a fool’s errand. In the backdrop of a global steel market, that has been in a profitability crunch for over a decade, thanks to China’s excess capacity, the future of the mill should be clear. It is a prime candidate for divestment, preferably through stripping assets and retaining the land for uses with clear positive externalities.

Whoever comes to power must undertake a rigorous exercise along these lines to determine the future for each SOE. No less than the fiscal sustainability of the federation is at risk. Trite ideas about retaining the family silver are just that — trite ideas. Because for now, if there is any family silver, we are choking on it.

The writer is a Lahore-based columnist and consultant with a background in finance, strategy, and energy markets.

Twitter: @assadahmad

Published in Dawn, July 21st, 2018