This is the dilemma facing our government. The companies that it owns include such icons as Pakistan International Airlines (PIA), Pakistan State Oil (PSO), Oil and Gas Development Corporation (OGDC) and many others which operate in industries ranging from steel to tourism.
Some of these companies have run up significant losses. Others are big money makers. Among the losers is PIA. Its accumulated losses as of September 2014 were roughly Rs 200 billion and it was continuing to lose money at the rate of about Rs 10 billion every month.
Among the winners is OGDC. It returned profits of Rs 124 billion last year and paid taxes to the government of Rs 48 billion. Even the much maligned PSO, which is at the heart of the ongoing fuel shortage crisis, earned profits last year of Rs 33 billion and paid Rs 11 billion in taxes.
The pressure to privatize comes from two sources. The first of these is the IMF and other international lending agencies that accept as axiomatic that privatization is panacea. The other is the government’s need for cash. Privatization brings in a one time windfall that theoretically is intended to plug deficits in the government’s budget. But in reality the money is used to repay interest and principal to international creditors including, yes, the IMF.
So what should be the government’s policy on privatization? First, setting aside considerations of profit and loss, the government needs to decide what it should be doing and what it should not. Two simple rules of thumb will help:
One, anything that has to do with public services remains in government ownership. This would include all public transport, power generation and distribution, oil and gas exploration, development and distribution, health services, and education. The government is obliged to provide these basic services to the public at reasonable prices even if that means incurring a loss. No private company can do this. But the government can. It can tax the rich and well to do and use the income to subsidize these basic services which are so essential for the poor.
And two, anything that has to do with manufacturing should be divested. The government has no business running factories. The white elephant that is Pakistan Steel is a good example. It loses money on every ton of steel produced. Clearly it renders no public service. An oblique argument could be made that it has a certain strategic economic value to justify government ownership. But this is fiction. The world is awash with steel and we can buy it much cheaper on the open market.
An ancillary question arises in the case of government owned public service companies: Can they be run better? Look at PIA. That it is losing money is not because it is owned by the government. The UAE based carrier Emirates is government owned but it makes a tidy profit while offering world class service. The difference is that Emirates is well managed and PIA is not.
This brings us to the heart of the matter: The issue is not ownership but good management or, what is known in management circles, as corporate governance. Wikipedia defines corporate governance as: ‘The mechanisms, processes and relations by which corporations are controlled and directed’. Look at any successful company in the world and you will see that it adheres to the principles of corporate governance.
These principles call for professional management and an independent board of directors. The board of directors is appointed by the company owners, in this case the government, and consists of professionals with a broad range of backgrounds. Their task is to supervise the company’s management. Once this structure is in place the government does not interfere.
The problem in Pakistan is that, while the structure is in place, as in PIA, it is circumvented or sabotaged by politicians. Management and the board are not empowered. The result is disaster.
The government of Pakistan would do well to emulate what Malaysia has done with its publicly owned companies. Malaysia has set up a holding company called Khazanah and transferred to it ownership of all public companies. Khazanah has professional managers and a board of independent directors.
The government does not interfere in the way Khazanah is run, nor does it allow anyone else to interfere. Similarly, all the companies owned by Khazanah have professional management and independent boards. Again no interference outside the structure of corporate governance is allowed.
Interestingly one of the companies owned by Khazanah is Malaysia Airlines. Compare Malaysia Airlines to PIA and the difference could not be starker. Their large fleet of planes is new and well maintained. On time performance is amongst the best in the world, inflight service is second to none. True, after losing two wide-bodied aircraft last year in freak accidents, the airline now runs at a loss. But this is not because of poor management. PIA cannot make the same claim.
The lesson is clear for Pakistan’s government: forget privatization. Set up a holding entity along the lines of Khazanah. Transfer all government owned public service companies to it. Isolate these entities from political interference. Then sit back and let corporate governance do the rest.