Public versus private ownership — case of PIA

We can reap fruits of privatisation if process itself is transparent, if PIA is not sold to unworthy private entities

PIA has become a classic example of the failure of public ownership. The key reasons are political interference, abuse as a platform to extend patronage to supporters, corruption, inefficient management, overstaffing and a powerful trade union. The airline that was once a beacon for other airlines is now a basket case for decay and management failure. PIA ran a staggering loss of Rs36 billion in 2015 while the cumulative losses over the decades run into hundreds of billions. The carrier continues to bleed despite fuel prices being at their lowest and the government continues to bail the airline out burning a hole through the taxpayers’ pockets. Meanwhile, the debate rages between the proponents and opponents of the privatisation of PIA. The opposition is, as usual, only trying to extract political mileage out of the turmoil without a concrete argument for or against private ownership.

This article aims at making sense of the massive wave of privatisation in the West in the post-Second World War era. It concludes that the experience of private ownership for all its faults has been the reason behind the success of capitalism. Pakistan seems bent on privatising PIA in the hope that private management will bring some sanity to the chaos. We have flirted with privatisation earlier as well with mixed results. It has apparently been a success in the banking sector. The Big Six (all local banks except one) posted a whopping cumulative profit of Rs130 billion in 2015. A dispassionate assessment is, however, needed to rule out cartelisation and improved protection of consumer interests post-privatisation.

Andrei Schleifer, Professor at Harvard and one of the top economists in the world, makes a lucid argument in favour of private ownership after examining the historical experience of both private and public ownerships. He singles out two key attributes of the private entity to plead his case. Private ownership is driven to innovate and reduce costs. Conversely, the case for privatisation makes sense if the new owners have stronger incentives to innovate and reduce costs. The success of capitalism versus socialism is founded on these two pillars. Even the Nobel laureates of economics in the 1930s failed to appreciate the nature of ownership as the primary source of innovation. They also argued that private firms fail to address social goals. This argument, too, is fallacious as social obligations can be easily met through government regulation of the private entity. For example, in the case of PIA, the fear that the private ownership would be reluctant to fly planes on unprofitable routes thus depriving some sections of the population fair access to air travel is misplaced. Government regulation is the answer, not government ownership.

Half a century ago, economists favoured government ownership of firms fearing creation of market inequities such as monopoly. Some even argued for nationalisation of a few firms in each industry to facilitate a comparison between public and private ownership. Leading academics supported state ownership of railroads and utilities in which it is virtually impossible to maintain effectively competitive conditions. The scene dramatically changed after the Second World War as states the world over went on a privatisation spree. The Contracting discourse emerged, which essentially argued for the government regulating private providers of services like education and health instead of owning them. The argument against private provision of schooling holds that private schools avoid taking problem students, whom public schools can be forced to take. Schleifer argues that the government can easily address this by paying for the education of some students at the private entities thus meeting its social obligation of ensuring universality of education as opposed to outright ownership of education provision.

“State firms are inefficient not just because their managers have weaker incentives to reduce costs or innovate, but because inefficiency is the result of the government’s deliberate policy of transferring resources to supporters,” asserts Schleifer. Similarly, trade unions around the world are typically the strongest opponents of privatisation because they are beneficiaries of government largesse in exchange for political support. There is no disputing that the rot at PIA is the cumulative doing of successive governments. The best way forward now is its privatisation. Ryan Air beat giants like British Airways by making air travel cheaper and accessible to all. It innovated in pricing and customising its services by segmenting the target customers on the basis of their expectations. Ryan Air eliminated meals from the economy section and tweaked the business model by doing away with travel agents to significantly improve the bottom line. We can only reap the fruits of privatisation if the process itself is transparent, if PIA is not sold to unworthy private entities for peanuts and if the government is willing to hold the privatised PIA accountable to its contractual obligations.

Published in The Express Tribune, February 16^th, 2016.

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