Pakistan International Airlines (PIA), Pakistan Steel Mills (PSM) and their kin, are all dead-weights that contribute nothing to the economy but are a major burden on government resources. Knowing this well, no party wants to privatise them. State Owned Enterprises are collectively incurring an annual loss of between Rs 400-500 billion. This is more than 25 percent of the total revenue receipts of the government in a fiscal year.
The Privatisation Commission in February this year announced plan to privatise PIA and PSM before the completion of the government’s tenure. Opposition parties, the PTI and PPP, put up strong resistance. They don’t want to deal with the problem implementing the transactions, having already assumed they will win the next elections.
The actual reason behind the reluctance to end the misery of these state funded enterprises may be much more sinister. What should be a simple economic decision to create efficient public projects is hijacked by the desire of political survival though patronage.
A white elephant is a possession which its owner cannot dispose of and who’s cost – particularly that of maintenance – is out of proportion to its usefulness, for example, PIA and PSM. In a study from 2005, two economists (JA Robinson and R Torvik) came to the despairing conclusion that politicians undertake inefficient public projects not because they just don’t know better; they do so because inefficient projects are better for their political careers. The reason why we have decades of money flushed down the drain is not incompetence but wilful ignorance of sound economic logic.
The theory is that good projects that benefit everyone, and can produce profits, are those that can be implemented by most politicians/parties. These projects (like say the Kalabagh Dam) can accrue long-term economic gains that uplift the total economy. However, these will not be undertaken because the gains are too dispersed over the population to generate specific patronage from the politician’s specific constituency.
In all efficient projects of economic and social transformation there will always be losers- this is a given. But the way markets work at a national/macroeconomic level means that efficient projects will produce more gains than losses. This is risky for a politician. Shutting down PSM, hypothetically, will be a loss to a certain number of people; people who have grown very lazy and very fat after decades of corruption and inefficiency. No politician wants to miss out on that patronage or potential kickback.
This is a pattern than many developing countries, especially those in Africa have fallen victim to. Examples include Zambia and Kenya where governments would invest millions in new factories to provide jobs in remote areas where they needed votes, ignoring feasibility studies that suggested that transportation costs would go so high that it would become cheaper to import the goods these new factories were producing. Why? Because votes and kickbacks were more important. This is true for the PML-N, PTI and PPP. Considering the latter two’s reluctance to engage with good economic policy whether it is Kalabagh or PSM or PIA, there is no hope that they will be able to turn the economy around and fill our economic deficits and energy shortfalls.
This fear brings me to the shiny panacea that the China-Pakistan Economic Corridor (CPEC) has become for all political parties and all of the power players in Pakistan. This is thought to be a major transformative project that will be a game changer for the economy. It is perceived to be good for all parties and all regions. It goes unquestioned in newspapers and political analysis. The opaqueness of it and the total lack of feasibility studies about it should be ringing alarm bells in intellectual and policy circles. No project of this scale is without losses, and if we cannot list the potential losses, we cannot manage them.
Great projects, whether it was the American transcontinental railways, or the Railway’s system in the Sub-Continent had losers galore (though they were way more expensive than the CPEC). The highways in the US linked interiors to the commercial centres leading to great economic development and immigration from the rest of the world. The British railways in India were eventually a means to link anti-Raj political movements- ideas could be exchanged and struggles aided through better print technology and transport links the British established. Yet, in the US, rampant speculative investments (overwhelmingly in railroads), and protectionism in Europe (where Germany was building its own grand transport networks) put a massive strain on bank reserves causing the depression of the 1870s. In British India, the massive railroads infrastructure made sure that resources could be extracted from the region. While Britain was able to rapidly industrialise because of the railways, the Subcontinent was unable to do the same because of this extractive project. No one denies that these project were of great benefits, but losses were inevitable. This is the nature of mammoth projects and in case of the CPEC we are operating with a blind spot created by our myopic enthusiasm.
The CPEC cannot be another white elephant. We already have empty schools and loss making mills. We cannot find in 20 years that we are paying off massive debts to China- that ports and posts across Pakistan that are empty and plants and factories that make losses can’t be shut down because politicians need votes. There is enough evidence to suggest that politicians will lead us to economic loss if it is in their personal and party’s interest.
The CPEC from its inception is a highly politicised project, but it must make clear economic sense. If it will create more jobs, are we sure that these jobs will go to Pakistanis? Do we even have the skills for the jobs that may be created in energy and construction? Where is the plan of the government to build these skills? How much do we stand to gain from trade through the route, if at all? Pakistan desperately needs to expand its manufacturing base so that it can plug its trade deficits (especially with China). Does the CPEC plan address this, and how? Again, this is not to suggest that the CPEC will not have benefits, but that we have no idea of the problems and no capacity to deal with them (usually we end up at the IMF).
And that is what the opposition implies when it says it does not want to deal with the implementation of a privatisation of our white elephants. They have neither the incentive, nor the nerve to. China has the nerve and incentive. But the Chinese state, though truly a friendly state, will look to its own benefit as a priority and the CPEC is first and foremost a Chinese project. Pakistan’s gains are a happy externality, and our politicians may not realise that there is no such thing as a free lunch. The CPEC will not solve all our problems. It will not develop Balochistan, it may not urbanise Sindh, lead to bigger and better arms and security deals with China, or create jobs. It can though, if our politicians do not let us down and invest in some feasibility studies.