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The question of privatisation
WHEN I wrote my columns on the six pillars for growth, people pointed out areas I had missed, including privatisation of state-owned enterprises. Since most SOEs lose money, I thought this topic was covered under the pillar of prudent fiscal and exchange policies. Upon further reflection, however, I should have added privatisation as a separate pillar required for growth. Here it is.
Before discussing privatisation, we need to address why the government, especially one as inefficient as ours, should be involved in the provision of goods and services at all.
Markets provide most goods and services quite well and therefore, globally, most governments don’t get involved in their provision, either from the standpoint of equity or efficiency. Running of petrol pumps, airlines or banks are examples of this. We, of course, continue to own PSO, PIA and National Bank.
Of course, for equity reasons, many governments get involved in the provision of education and health. I have argued in these pages that since misgovernance in Pakistan is the rule and not the exception, we’d be better off if the government just subsidised education or health through vouchers or insurance, rather than government-operated facilities.
For instance, government schools, on average, cost Rs3,000 monthly per child, whereas low-cost private schools with better education outcomes charge only Rs1,000 per month.
We don’t really need the government to run petrol pumps, oil wells, ports, airports, railways, etc.
There are, however, certain services that the market fails to provide because potential suppliers can’t exclude beneficiaries who don’t pay (for instance, beneficiaries of law and order, street lights or better air quality can’t be excluded if they don’t pay for them).
This is where governments are supposed to step in, either through direct provision (for instance, police service, better air quality through regulations and fines, etc) or through contracting out services to vendors, such as citywide installation and maintenance of streetlights.
Since governments are inefficient, it’s best to have private vendors provide these services where possible. But certain services like defence, police, courts, etc cannot be outsourced.
There are also utility services where competition is impossible between existing big firms and new entrants because the cost of adding new customers is really cheap for the existing firms.
For instance, the cost of adding a new customer for Karachi Electric (KE) is only the cost of the wire from the nearest pole to the customer’s home, whereas for a potential new entrant, the cost would be to lay the connection from the generation site to the customer’s home, perhaps hundreds of miles away.
So new firms can’t compete and thus large utilities end up being monopolies that can fleece consumers. This is where the government needs to step up as a regulator and stop natural monopolies such as power, gas and water utilities from overcharging consumers. But there is no reason for the government to provide these services itself.
In the 1970s, when socialism was the rage, Britain pursued policies that some people later derisively referred to as ‘producer socialism’, that is socialism for the benefit of those producing goods and services (ie government employees) and not those consuming them (ordinary citizens).
Pakistan today has producer socialism on steroids. Take PIA for instance. There are four private airlines that also operate here, offering newer aircrafts and comparable or better service and fares.
The only difference is that PIA loses billions every year that we have to foot the bill for whereas private airlines make money and pay us taxes. So PIA really is running for the benefit of 10,000 or so (mostly underpaid) employees and not for the benefit of 220 million Pakistanis.
The value of PIA’s accumulated losses and subsidies is over Rs635 billion or $2.8bn, which if we had today in our foreign exchange reserves would solve a lot of our problems.
But the problem is that whenever a government tries to sell it, PIA’s management and employees, the aviation ministry and the opposition get together and block the sale. Resultantly, we lose enough money to build a new Aga Khan University Hospital in a different city each year.
As bad as PIA is, it is a paragon of efficiency compared to our electricity distribution companies, or Discos. Our Discos fail to collect up to 17pc of the bills from customers that are still being supplied electricity. And they lose another 17pc of electricity during distribution. Together this means that 34pc of the electricity we produce is stolen or lost, making our electricity expensive to those who pay.
The two Sui companies are similar and they too should be privatised, perhaps after being broken into smaller companies. These companies today have “unaccounted for gas” (UFG) of about 400 mmcfd, meaning they don’t actually know what happens to this gas, whether it’s leaked or stolen, etc.
About half the gas supplied to Balochistan by SSGC is considered UFG. The total losses through UFG of the two companies come to $200m per month.
Over the last many years there have hardly been any improvements in distribution or bill collection or UFG. The only way to make things better is to privatise. It goes to reason that if an owner’s own money is at stake, things will improve.
Of course, we can’t just stop at distribution companies. We must also privatise generation companies and all other SOEs.
As we privatise these SOEs, it’s important to understand the role regulators play worldwide and how our regulators — due to laws, scope and competence — have been too feeble and bureaucratic to properly secure consumer interest. Regulation is a core government function and so we must make regulators stronger and better.
We need our government to run the courts, police stations and air traffic control. We don’t really need the government to run petrol pumps, oil wells, ports, airports, railways, etc.
Our SOEs in these fields lose hundreds of billions each year and cost even more in opportunity cost by making our economy less competitive. By privatising these SOEs we will reduce the footprint of the government and increase tax revenues, employment, and economic growth.
The writer is a former finance minister.
Published in Dawn, December 30th, 2022
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