Privatization of Assets or Burdens?

Spearhead Analysis – 10.11.2017

By Raja Safiullah
Research Analyst, Spearhead Research

According to the International Monetary Fund’s (IMF) report on Pakistan’s Structural Reforms Program, under the three-year Extended Fund Facility (EFF), the losses incurred by the three major Public Sector Entities (PSE) amounted to a staggering Rs.705 billion in the three years ending September 2016. The declining trend in performance of the infamous trio – Pakistan Steel Mills (PSM), Pakistan International Airlines (PIA) and Pakistan Railways (PR) – has led successive Governments to flirt with the idea of privatization of these entities. In the meantime, tax payers’ money continues to be used to bail-out these PSEs. To lift the undue burden from the tax payers, the Privatization Commission (PC) was formulated by the former Prime Minister of Pakistan, Nawaz Sharif, with a renewed political will and vigor to offload such underperforming PSEs. Political differences and vested interests have posed significant hindrances and the PC has seemingly lost its direction. The more important question, nevertheless, persists: should loss-incurring PSEs be viewed as burdens and consequently be privatized immediately, or are these assets that can be turned around into profit-making entities?

The PSEs weren’t always laden with losses, with PIA being the primary example of a PSE that was remarkably well-run, profit-making and served as an emblem of national pride. Years of political and bureaucratic influences, over-staffing, corruption and mismanagement led to the gradual deterioration of PIA. Once deemed a leading airline in the world, PIA helped train and set up ventures such as Emirates Airlines, UAE. Today, PIA is a shadow of its former self, crumbling under the high debt levels and mounting losses and the government has time and again proposed to privatize it. Such proposals have been vehemently rejected by multiple political factions within the country, who feel the need to restore the institution to a decent standing before it is sold off, if it all. The shutdown of important routes, like the one to USA is a gentle reminder that the once mighty airline is at its lowest point right now. The Senate, which has been tasked multiple times to review the case of PIA, has also been critical of a privatization move if done in haste. They have pointed out the problems of over-staffing, nepotism, corruption and general mismanagement that have led to the decline of PIA. Perhaps they have rightly reminded the government that these are issues that can very well be dealt with, and PIA can be a contributing part of the public sector. The debate over the fate of PIA continues in the Senate and was passed on to the Economic Coordination Committee’s (ECC) meeting on 1st November 2017, chaired by Prime Minister Shahid Khaqan Abbasi. Another bailout package was approved to increase the commercial borrowing guarantee limit of PIA by Rs13.6 billion, to try and pull the national flag bearer out of the deep financial crisis.  

The reluctance shown by the Senate in the case of PIA, or the general political sentiment, cannot be undermined given how poorly earlier privatization ventures of major PSEs have been handled. PSM is a case in point, which was about to be sold for ‘peanuts’ after incurring huge losses as per a financial audit report in 2006. The Supreme Court (SC) stepped in with a Suo moto notice and stopped the sale proceedings. The then Prime Minister, Shaukat Aziz, along with the support of President Musharraf was willing to facilitate the sale of PSM along with its assets for a bare minimum price to a group of foreign and local-based investors. The SC questioned the move by the individuals engaged in the privatization proceedings, and the inaction on the part of Ministry of Production, even when faced with overwhelming evidence of corruption and wrong doing. The sale was eventually blocked by the SC, and to this day PSM continues to be stuck with burgeoning losses and debts. As it stands, PSM is currently non-functional and it owes Rs.66 billion to the National Bank of Pakistan (NBP) and Rs.40 billion to the Sui Southern Gas Company (SSGC). The trade union claims that since 2016 some 3,000 employees have not been paid, and gratuity to former employees remains unpaid since 2013, and provident fund for retiring staffers has been withheld since 2015. The losses and liabilities continue to mount, as Sindh government challenges Federal government’s plans to sell off some 8,000 acres of PSM land to clear the liabilities before privatization, since it was Sindh government that gave this land for construction of PSM in 1974.  In the words of Mohammad Zubair, the Chairman of Privatization Committee, “Finding a potential buyer for Pakistan Steel Mill will be a nightmare because the company is a nightmare”.  

Interestingly enough PR has fared much better than the other two PSEs, and the privatization issue of PR appears to have been put on a back burner for now. Minister for Railways, Khawaja Saad Rafique, claims to have turned the fortunes around for this once distressed organisation. While the improvement might not be as dramatic as he suggests, the progress is nevertheless definitely there. An encouraging 55% increase in revenue has been noted from 2013 to 2017. This has enabled PR to undertake extensive upgradation of the track, from its own resources – the figure quoted is around Rs.100 million. PR has also recently finalized plans to upgrade and construct some 50,000 kilometers of tracks across the country on build, operate and transfer (BOT) basis. While some form of state inaction has been monitored in un-regulated freight rates by private vendors according to a recent Dawn report, nonetheless the Ministry has been able to deal with corruption by regaining some illegal encroachments of PR’s property, and handing out ultimatums to the rest. The administrative improvement, along with expansion schemes have set PR on the right track, in realizing greater national interests. The historic railway track at Torkham might soon be restored, that connects Pakistan to Afghanistan, and could greatly facilitate trade and relations between the two countries, as a high-level delegation from PR recently visited the track and declared the intention to rehabilitate it.  

PR might have earned the right to pose as a success story relative to the failures inherent in PSM and PIA, owing to a better strategy adopted by the relevant ministry. The need nevertheless remains to discuss the fate of any major PSEs that have been privatized over the years. Karachi Electrics Supply Company (KESC) appears to be a case in point, given it wasn’t just a major PSE but was also a heavy loss-incurring enterprise prior to the privatization, much like PSM and PIA. The magnitude of its woes in pre-privatization period, while lower than PSM and PIA, were nonetheless there with day-long power outages and high electricity rates. Private equity firm Abraaj Capital was able to buy majority shares in 2005, and was handed the management in 2008. Abraaj invested a hefty Rs.100 billion in Karachi Electric (KE), formerly KESC, by taking loans from international organizations and companies. This initial investment was able to help them in cutting down on daily power breakdowns, financial hemorrhage of Rs.15 billion and reap profits. It came at the cost of laying off some 7,000 employees out of approximately 18,000 employees. This resulted in civil unrest that could have compromised the nascent project, before the government came in to help.

The National Electric Power Regulatory Authority (NEPRA) has only recently decided to stop cutting KE excessive slack, and has been keen to revisit KE’s failures since privatization. The impetus of which was provided by the deadly heatwave of 2015 that killed around 1300 people in Karachi, as KE was unable to provide power supply and the much-needed relief. NEPRA followed the condemnation with fines amounting to Rs.10 million in 2016 for KE’s failure to provide uninterrupted power supply to consumers and deliberate underutilization of its generation capacity. Chairman of NEPRA pointed out how the company had avoided full utilization of its generation capacity for greater profits, and violated agreements and regulations even with continued government support in the form of subsidies years after privatization. Thus, it appears that after privatization instead of an increase in the generation capacity, KE instead has been marred by underutilization of generation capacity, inefficiency and a focus on bottom line profits. The tax payers’ money continues to be used to subsidize KE since privatization, given NEPRA claims KE has been handed out Rs.10 billion in subsidies since the privatization by the government. Twelve years on, the financial duress has still not been laid to rest as KE is currently deliberating selling 66.4% shares of the company to the Chinese company Shanghai Electric in a deal worth Rs.180 billion.

 The dismal state of the major PSEs PIA and PSM is a reality that cannot be disregarded or ignored. They have performed poorly for years and have leeched off the hardworking taxpayers for bailouts. The important thing to remember, nevertheless, is that they weren’t always loss-incurring enterprises. Some of the PSEs were remarkably profitable and served the state and the citizens well. The idea of privatization only surfaced when the state’s institutions tasked with these PSEs entered a period of decay. The call for privatization, therefore, appears to be a deflection of responsibility on the part of the state and a cover-up of its failures. Champions of privatization have for years now claimed that a state should not be running businesses. Charles Tilly would be keen to remind them that operations of a state mirror that of a business, providing security and services in return for taxation, and that state-hood is in itself the oldest business to have existed since the start of civilization. Interestingly, these champions of privatization were nowhere to be seen when these major PSEs were pulling rabbits out of the hat, and remained silent on the case of countries faring well in terms of major PSEs around the world. The discourse over privatization of PR has also died out in the face of considerable improvement.

KESC was privatized in 2005 with considerable pomp, and only a decade later the government is having to deal with the infirmity of the private sector. If anything has been learnt by the privatization of a major PSE like KESC, it is that privatization alone is not the answer to Pakistan’s loss-incurring PSEs. The loss of lives in 2015 in part because of deliberate underutilization of generation capacity and selective power supply by KE should be a reminder for us all that the private sector will always put profits before people. State regulation, therefore, becomes of paramount importance, be it in the transition period or in the post-privatization period. The regulatory bodies need to be further strengthened and made proactive instead of reactive to the ailments of the private sector. Stronger repercussions should be reserved for the perpetrators, and welfare of the citizens should be given as much priority as attracting foreign or local investment. On the flip side, if we are to take an unpopular road to holding unto the public assets then there is a need for the state to own up to the shortcomings and address them. Corruption and nepotism that remain rampant in the public sector need to be curtailed, if we are to make these PSEs steadily profitable again. In either case, it is important for the state to be held accountable for the decline, the current state and the way forward for the faltering PSEs.  In the past there have been many suggestions for managing Privatisation. These included the formation of a Blue Ribbon commission of private sector experts to oversee all policy matters and give policy suggestions/recommendations. For PIA there was a suggestion that a former PIA Chairman like Air Chief Marshal Rao Suleman could be tasked to study the situation and give his unbiased and expert views. A similar exercise could be undertaken for PSM. At least the real problems in PIA and PSM will be out in the open.  

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