Concluding profit

The series of articles on Profit had a rather humble origin at the beginning of 2012 and never in the wildest was it ever envisaged that it would extend to 24 articles (all published in the Business Recorder), and still counting. In essence, the conviction to reflect upon opposing dogmas, as time progressed, unnecessarily diverted the debate; however the prevalent formidable, albeit misguided, views relating to state monopolies needed to be assailed. On the other hand, considering the recent change in mindsets of the domestic pundits on revamping State-Owned Enterprises (SOEs) under professional management rather than outright privatisation, evidenced by edicts of the so-called analysts on the idiot box, is rather satisfying; perhaps it was worth the effort!

Serendipitously, perhaps there are still numerous unexplored tangents to profit, and a conclusion to the series is rather premature. However, as aptly advised in the world of finance, closing the deal is more critical than procrastinating over perfection. With the government-in-waiting mulling over the future course of action to transform SOEs, the conclusions became a fait accompli.

Except that the concept of state profiting goes beyond simply managing existing SOEs. At the outset, it challenges the current practice of measuring performance against popular economic indicators, such as GDP, tax-to-GDP ratio, deficit and debt. From an accountant’s perspective, the methodology behind collecting data for, assumptions and basis of calculating and the very appropriateness of GDP, as an indicator of economic stability, let alone a nations profitability, is fantastic. Similarly increased taxation to meet unproductive government expenditure and at the same time expecting private sector to spearhead economic growth is even more remarkable. Finally, debt and deficit, accumulated for financing productive development expenditure is prescient, as opposed to being a burden. However, a budget where further borrowing is necessitated simply to service previous obligations, the proverbial debt trap, can hardly be deemed appropriate.

Going forward, in simplistic terms, whatever remains within a nation’s boundaries, tangible or intangible, does not impact the bottom line. Third party trade is the sole determinant of a profitable nation. As the mercantilists professed, at the end of the day trade was useful only if the bullion came home, ie a trade surplus. Which is not to stay that a nation cannot have an adverse trade balance when it imports technology or capital goods needed for productive investment, export oriented or import substitution. All this should sound familiar to the pundits from yester years. When, why and how these critical strategies for developing nations got clouded, while conspiratorial, is unimportant. “Back to the Future”, borrowing the title of a movie series, is the need of the hour.

A quick review of Pakistan’s annual net trade balance for good, services and investment income over the last few years clearly unveils what the nation has gained, rather lost, from policies geared towards free trade and unrestricted flow of services and currency. Having diligently pursued the dictates of western thought for decades, and remaining unable to arrest the continuing economic decline, maybe it is time to take a different path; a time to change economic thought!

The central theme underlying the concept of a national profit, emanating from the deliberations during this series, albeit unilateral, is that only an increase in national assets, year-on-year, is a nation’s true profit; which by the way is exactly the same for an individual, a corporation or any other entity. And recall, national assets are everything above and below within the international borders of Pakistan, for abundant clarification of this abstraction, banking deposits are national assets.

From the above, it automatically transpires that national assets should only be entrusted under efficient management, whether in the private sector or under public ownership, except that in the case of the former a significant but reasonable proportion of monopoly rent should find its way into the national coffers. Obviously, an accompanying policy of active protectionism is a given. The fallacies relating to state monopolies have already been tackled in previous articles at length and hence are not being repeated. Without doubt, this particular path presupposes a commitment on the part of the national leadership coupled with the will to dismantle lobbies and vested interests.

Again in earlier parts of this series it was concluded that only profit-makers, referred to in common parlance as technocrats or professionals which terminology nonetheless is still incomplete when compared with the term profit-makers as used in the series, are competent to efficiently manage and enhance national assets. Since profit-making can neither be taught nor inherited, the task of identifying and recruiting profit-makers is the next hurdle. Admittedly this task is in itself is herculean, although not impossible.

This brings the debate to the final riddle; why even when profit makers are identified and charged with management of public assets, their performance is mediocre when compared with the performance of these very individuals in the private sector?

In fact even the reverse is true, when public servants move to the private sector, there is a marked improvement in their productivity. The answer, perhaps differently articulated earlier by an unknown author, when something is owned by many; in essence it is owned by no one.

This particular problem also afflicts the private sector, albeit till now only in the west where corporations are largely owned by scores of small shareholders. A lot of research is being conducted internationally to devise controls for checking the largesse of professional management, CEO remuneration being a small part of the equation. In fact a recent issue of economist ran an article which proposed to take back performance incentives previously paid to management in case of a subsequent decline in net worth of the business. Why is this not an issue in Pakistan’s private sector? Well primarily because most private businesses continue to be majority held, directly or indirectly, by the primary sponsors, meaning that somebody, and not everybody, owns the business.

The bad news is that the pundits are still toiling in the laboratory searching for the perfect solution to this predicament. The good news is that within the domestic environment, the second best option might still be sufficient. This was why the Ministry of Profit, by whatever name called, was conceived. Note that this is not a ground-breaking idea; it is simply an offshoot of the Chinese model, The State-Owned Assets Supervision and Administration Commission of the State Council.

The primary concept is to completely and comprehensively block political intervention from the management of public assets; easier said than done. Again the nearest fail safe solution, divorcing through legislation all public enterprise from the clutches of the parliament and the bureaucracy for all times to come, will require political will. In addition, policy-making and monitoring will need to be completely separated from day-to-day operations carefully ensuring that no economic benefit whatsoever should accrue to the monitors from the units under their purview. Particularly while profit-makers are required for operations, vast experience is a condition precedent at the top.

Is all that possible? Apparently not absolutely! But as stated earlier, as near as reasonably possible should be palatable. The intent is to put forward a framework in the final part of the conclusion to this series.

In the meanwhile, comments are actively solicited and welcomed at syed.bakhtiyarkazmi@gmail.com