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‘Wealth Fund’ for privatization

The PTI government has decided to create a ‘Wealth Fund’ to turn loss-making public sector enterprises (PSEs) into profit-making entities before their sell-off.

The list of PSEs that would merit help from the proposed ‘Wealth Fund’ is expected to comprise, among others, Pakistan Steel Mills, Pakistan International Airlines (PIA), Pakistan Railways, Utility Stores Corporation, National Highway Authority and the Civil Aviation Authority (CAA).

The proposed ‘Wealth Fund’ would aim at making the loss-making public sector enterprises operational and profitable through funding from the Fund.

While the plan seems still very vague, the source of financing the ‘Wealth Fund’ has not been identified so far except that government planned to invest in each entity in phases, and that the loss-making public sector entities would be selected based on certain merits step by step.

Meanwhile, the Cabinet Committee on Privatisation has directed the industries ministry to bring up a viable action plan by the middle of December for PSM turnaround. Similar plans are said to be in the process of being prepared by relevant ministries for other entities under consideration for privatisation.

In the absence of the core details of the scheme, it is not possible to know whether or not it can deliver. However, since its objective is also the same as the past ones – to sell-off after helping these entities to turnaround – it is likely to fail no matter how workable it is. Why would anybody be motivated enough and take the trouble of turning them around knowing that the ultimate aim is to sell them off?

Privatisation of PSEs is one of the most important conditionalities that accompany IMF programmes aimed at introducing macroeconomic stability in countries that approach the ‘lender of the last resort’ for emergency assistance to escape certain debt default which more often than not would accompany significant current account and budgetary deficits as well.

PSEs are the legacies of an entrenched mixed economy model that Pakistan had followed until about the late 1980s. The nationalization spree of the 1970s had added further burden to the government’s budget as well as stretched to the limits the managerial capacities of the civil bureaucracy which were given the responsibility of managing these enterprises.

The mixed economy model morphed into free market economy model under the burden of IMF conditionalities when during the 1990s, elected governments, both of the PPP and PMLN, were obliged to introduce the Washington Consensus- related economic reforms in return for the much-needed Fund assistance to bridge the yawning gap between stagnating national incomes and expanding national needs.

Many of those PSEs which were privatised since were abandoned by the buyers immediately after having fleeced their cashable assets like land and serviceable machinery. Many which were not abandoned were, however, turned into money spinning enterprises by frequent price hikes. Those that are being well-managed do evade and/or avoid paying taxes due to them.

A government has no business doing business. Sounds logical. But 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.

A government without business know-how would hardly be able to maximise social benefits of a public sector entity at a minimum financial cost. In most developed societies, this is done by establishing legally sound, autonomous statutory regulatory mechanisms. And even after such mechanisms are developed, air, road and rail transport, energy-related units, public health institutions and public schools at least up to primary levels, would need to be kept under government control, no matter how much the cost.

A big chunk of unnecessary financial losses that these public-sector entities of social value are incurring currently can be eliminated by cutting down on waste and replacing inefficient managements 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 its 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.

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.

Take for instance, the Pakistan Steel Mills (PSM). No matter how you run it, at the production capacity of 1.1 million metric tons, it can never be financially profitable even if you cut its fat to bare bones. Its social value is too dubious to merit any consideration. So sell it as it is even if it fetches only one dollar (the land in its possession should, however, be sold at market price) because every passing day would only add to its losses and increase the burden on the national budget.

However, going by our private sector’s level of entrepreneurship such a move would only end up in the closure of the steel mills with the buyer selling its assets to recover the price.

Therefore, the best way to go about making the steel mills viable is to expand its capacity to three million tons which was what the original plan had envisaged.

Most of the financial losses that PSM is incurring currently can be eliminated by cutting down on waste and replacing inefficient managements with efficient ones.

Pakistan International Airline is not only a national asset; it is also a national heritage in the true sense of the term. It may perhaps never run as a financially profitable company, but its social profit has always been incalculable.

Indeed, had it not been for the Orient Airways and subsequently PIA, the two wings of Pakistan divided by almost 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, PIA 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.

PIA’s managers and pilots have contributed crucially to the establishment of most of the Middle Eastern national airlines, which today are counted among some of the best in the world. And during the period when it was being managed by the 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 as far away as the four corners of Balochistan and the Northern Areas.

Of course, not everything of social value would be profitable and not everything that is profitable would be of social value. And to quote from an article, “Why governments should not be run like a business”, by John T Harvey in Leadership, 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.”

Of course, entities having no social value but are still running into massive losses need to be sold off on ‘as is, where is’ basis without going about trying to turn them around.

However, taking such an approach would be wrong for PIA, Pakistan Railways, power-generation 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, these entities have as much social value as the armed forces, security agencies, libraries, parks, public schools and public health institutions.

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 the import bill by being an expert of the market as are the international oil sharks, racking in millions on price fluctuations of as little as a minimal most fraction of a cent.

Donor-driven poor countries need business-minded governments even more because if you are not well versed in what is happening in international trade, more likely than not you are going to end up returning almost the entire aid back to the donor country in import bills.

M Ziauddin, "‘Wealth Fund’ for privatization," Business Recorder. 2018-11-14.
Keywords: Economics , Pakistan Steel Mills , Pakistan International Airlines , Cabinet committee , Price hikes , Orient Airways , Original plan , IMF , PPP , PMLN , CAA , PIA