Public sector efficiency: A billion-dollar challenge

There is a need for a paradigm shift in the operating modalities of SOEs

ISLAMABAD:

It is quite topical nowadays that most public sector institutions are operating in the red with piles of debt and plenty of inefficiencies in their operating models. This is just one part of the story.

The real point to ponder is not the financial aspect but the efficiency loss and resulting opportunity cost. The efficiency loss of public sector enterprises in Pakistan is a serious issue that affects the country’s economy and fiscal stability. According to some estimates, only eight public-sector enterprises lose an estimated Rs250 billion annually. The number may go up to Rs1000 billion per year if all state-owned enterprises (SOEs) are taken into account. These enterprises include power companies, railways, airlines, steel mills, and others that provide essential public goods and services. It is well documented that the financial performance of such SOEs has remained unsatisfactory due to various factors such as mismanagement, corruption, political interference, overstaffing, and lack of competition. However, the efficiency losses have not been estimated at all.

The government of Pakistan has initiated various reforms to improve the efficiency and profitability of these enterprises, such as privatisation, governance reforms, restructuring, and performance-based contracts. However, these reforms face many challenges and resistance from different stakeholders, such as employees, unions, political parties, and civil society groups. Therefore, the government needs to adopt a comprehensive and coherent strategy to address the root causes of inefficiency and loss in the public sector enterprises. Some possible measures include:

- Developing a clear ownership rationale for each enterprise based on its strategic importance, market failure, social welfare, and fiscal risk.

- Establishing an independent and professional board of directors for each enterprise that can oversee its management and operations without political interference.

- Implementing a transparent and merit-based recruitment and promotion system for the employees of the enterprises that can ensure accountability and performance.

- Introducing a competitive and market-based pricing mechanism for the goods and services provided by the enterprises that can reflect their true costs and benefits.

- Enhancing the regulatory and oversight role of the relevant ministries and agencies that can monitor the performance and compliance of the enterprises with applicable laws and standards.

These measures can help improve the efficiency and profitability of the public sector enterprises in Pakistan and reduce their fiscal burden on the national budget. They can also contribute to the economic growth and social development of the country by providing quality and affordable public goods and services to the citizens.

Now, to the second part of the story: how to assess the efficiency losses and mitigate them accordingly.

There are various qualitative and quantitative methods and approaches to measure the efficiency of public sector enterprises, particularly the yield of resources, such as human resources, deployed.

An efficient enterprise would be one that produces the maximum possible outputs given its inputs, or one that produces a certain level of output with the minimum amount of inputs. The process of trying to measure a public sector enterprise’s efficiency can therefore be broken down into three steps. First, its inputs and outputs need to be defined and measured. Secondly, it is necessary to define what is feasible – in other words, what outputs could be achieved for any given set of inputs. Finally, the enterprise’s actual inputs and outputs are compared with the set of feasible inputs and outputs. At this stage, one of two questions can be asked: ‘Is it feasible to achieve superior outputs, given the set of inputs being used?’ or ‘Is it feasible to use fewer inputs to achieve the same outputs?’. The way the first two steps are carried out will typically be highly influential on the outcome of the third. If we apply this approach to the public sector enterprises in Pakistan, I doubt if even a few of these would be eligible to be termed as efficient, probably with the exception of the likes of OGDC.

Rather than the traditional approaches of subsidising or privatising state-owned enterprises, we need to ascertain whether allocative efficiency is being attained in these through a comprehensive efficiency assessment or audit. While there is no “ideal” or “standard” performance in the production of government services, especially where competitive conditions obviously do not exist, the most that can be achieved is to develop management and information systems that mirror as closely as possible conditions that will maximise efficiency.

There is a need for a paradigm shift in looking at the rationale and operating modalities of public sector enterprises. While the rationality of public service provision is strong enough to keep these in the public sector, there is no harm in opting for an efficiency approach in designing the structure, operations, and service delivery of such enterprises.

THE WRITER IS AN INTERNATIONAL ECONOMIST

 

Published in The Express Tribune, October 9^th, 2023.

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