Don't Privatise PIA, improve its Governance

This article was published on Monday 15th Feb, 2106 in Express Tribune, but with important comparisons with PTCL omitted. Full article given below:

First, let us note that China currently has about 150,000 SOEs, which hold more than 100 trillion yuan ($15.7 Trillion) in assets and employ over 30 million people. Despite this “handicap,” China handsomely outperformed Brazil, Russia and India. Starting from a nearly equal position in 1990, Chinese GNP per capita grew by 730%, while Brazil, Russia and India (with far fewer SOE’s) could only achieve 185%, 118% and 374% respectively. Evidently, privatization 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.

The once celebrated PTCL privatization has recently been termed a mega-scandal by NAB. PTCL was well on its way to becoming the first Pakistani multinational company when the carpet was pulled out from under its feet. After earning 29 billion in profits in 2004, it was sold for a paltry 2.6 billion, most of which remains unpaid after ten years. Lack of clarity in contracts have allowed the buyer to appropriate extremely valuable government assets, increasing its profits. Meanwhile, foreign appropriation of revenues in various guises has reduced PTCL profits to only 10 billion.

While there have successful privations elsewhere, the Pakistani record is dismal. Here, “privatization” 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 privatized SOE’s which were stripped of their assets and left to rot. For this reason, the list of failures, and mega-failures, of privatization 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 SOE’s 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 program 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 governance of PIA, instead of insisting on privatization. Nobel Laureate Joseph Stiglitz asked IMF a similar question: “Why privatize 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 their response was 'because we always do it'. Despite having served as the Chief Economist at World Bank, he could not penetrate the veils of secrecy at the IMF to learn whether their 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 favors 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% 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 GMs and Managers of their choice. Thus top four tiers of management did not have any experience with 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 grounding halt and, contrary to the proclaimed intention, opened more avenues for corruption. Many initiatives to utilize exceptional talents at PIA by taking in outside repair jobs, running trainings etc. were quashed by indifference at higher levels. An exceptionally good deal to acquire seven new aircrafts from a Kuwait based company was rejected, while huge loans at high interest rates were taken to lease used aircrafts at inflated prices. Surprising as it may seem, if we remove the burden of interest payments on these loans, the 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 the PIA is an SOE, regardless of whether or not it is privatized, 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 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 privatization plan which would be acceptable to all parties. It would certainly be superior to selling to mysterious companies recently incorporated in Nairobi whose payment check bounces. The employees of the PTCL created a buyout plan which would have been far more favorable to the government and Pakistan, but it was ignored. Growth depends on building and strengthening institutions, both public and private. Imagine the consequences if we were to sell all inefficient ministries to foreigners!