Don’t privatise PIA, improve its governance

‘Privatisation’ is actually an asset sale at throwaway prices. This is what might happen if PIA is privatised

First, let us note that China currently has about 150,000 state-owned enterprises (SOE), which hold more than 100 trillion yuan ($15.7 trillion) in assets and employ over 30 million people. Despite this ‘handicap’, China handsomely outperforms Brazil, Russia and India. Starting from a nearly equal position in 1990, the Chinese GNP per capita grew by 730 per cent, while Brazil, Russia and India (with far fewer SOEs) could only achieve 185 per cent, 118 per cent and 374 per cent, respectively. Evidently, privatisation is not necessary to achieve spectacular growth. Emirates, Etihad, and Qatar Airways are all state-owned airlines which started from scratch and have developed excellent global reputations for quality, overtaking many privately-run airlines. Our own much-maligned PIA was once the pride of the nation, and envied by many rivals.

While there have been successful privatisations elsewhere, the Pakistani record is dismal. Here, ‘privatisation’ is actually an asset sale at throwaway prices. To enable such sales, the government not only takes over all liabilities, but covers many types of business risks, essentially guaranteeing enormous profits to the buyers. This misunderstanding is reflected in the corpses of many privatised SOEs, which were stripped of their assets and left to rot. For this reason, the list of failures, and mega-failures, of privatisation both within Pakistan and globally, is endless.

To those who can look past ideological blinders, it is perfectly clear that success or failure of private businesses as well as SOEs is based on essentially the same factors. Among the success factors, good corporate governance plays a key role. Recognition of this has led to widespread adoption of good governance principles globally among both public and private sector enterprises. Interestingly, the IMF programme office for corporate governance in the Middle East and Africa is based in Islamabad. The IMF also supports the Pakistan Institute of Corporate Governance. This is a non-profit group run by highly qualified Pakistani executives who run courses on corporate governance for directors and senior managers of Pakistani companies. We may ask why the IMF did not insist on improving the governance of PIA, instead of insisting on its privatisation.

Nobel laureate Joseph Stiglitz asked IMF a similar question: “Why privatise the Korean steel industry? It was one of the most efficient in the world, which was making profits, not losses, and contributing to government revenue?” He reports that the IMF’s response was ‘because we always do it’. Despite having served as the chief economist at the World Bank, he could not penetrate the veils of secrecy at the IMF to learn whether its policies were driven by inertia, ignorance, ideology or hidden agendas.

Before suggesting solutions, it is necessary to clear up some widespread myths. First, although there is no doubt that political favours have led to hiring of some incompetents, the situation is nowhere near as bad as it is made out to be. The payroll is only about 16 per cent of the PIA budget, showing that overstaffing is only a minor problem. The major problems started after 2005, when senior management consisting of experienced insiders were replaced, at salaries unheard of in PIA, by people with no airline experience. They in turn recruited general managers and managers of their choice. Thus, the top four tiers of management did not have any experience of running airlines. Standard bureaucratic hierarchical structures ensured that those with the required experience were not consulted on critical decisions. The literal implementation of rules suggested by PEPRA and Transparency International were the last nail in the coffin that brought timely decision-making to a grinding halt and, contrary to the proclaimed intention, opened more avenues for corruption. Many initiatives to utilise exceptional talent at PIA by taking in outside repair jobs, running trainings and so on, were quashed by indifference at the higher levels. An exceptionally good proposal to acquire seven new aircraft from a Kuwait-based company was rejected, while huge loans at high interest rates were taken to lease used aircraft at inflated prices. Surprising as it may seem, if we remove the burden of interest payments on these loans, PIA is actually making a small profit on its current operations. This shows that it is not operational inefficiency, but bad management, which is the problem with PIA.

Since PIA is an SOE, regardless of whether or not it is privatised, the debt burden is the responsibility of the government. PIA does not have insurmountable structural problems. There is enough dynamism, initiative and know-how in the current and past staff of the PIA that if they were given a clean slate and an opportunity to run the company, they could operate it efficiently. Pakistan is also blessed with many world-class business leaders who have the desire to serve their country and have excellent management skills. With vision and support from the government, an appropriate team could put together a turnaround plan in short order. We must erase the debt burden to allow for a fresh start, and also make radical management reforms. If it is necessary to pander to the IMF, an employee buyout provides a privatisation plan, which would be acceptable to all parties. It would certainly be superior to selling to mysterious companies recently incorporated in Nairobi, whose payment cheques bounce. Growth depends on building and strengthening institutions, both public and private. Imagine the consequences if we were to sell all inefficient ministries to foreigners!

Published in The Express Tribune, February 15^th,  2016.

Like Opinion & Editorial on Facebook, follow @ETOpEd on Twitter to receive all updates on all our daily pieces.