Last week’s anti-privatisation article caused a lot of ripples, at least amongst friends and colleagues, resulting in numerous passionate debates. Unfortunately, the proponents of privatisation completely failed to appreciate the crux of the argument and continued to be swayed by theories emanating out of developed economies. The belief that those striving for access to global markets will selflessly propagate solutions in the best interest of the developing markets, to their own detriment, verges on naivety. Accordingly, spending a little bit of time to review current developments across the globe, before arriving at conclusive actions, might not be an exercise in futility.
In a recession, facing a fiscal cliff, developed nations practice quantitative easing, pumping tax payers’ money into private entities since they are too big to be allowed to fail, imposing certain regulations on free flow of capital, enhancing the regulatory regime and even consider nudging savings towards investments deemed appropriate for economic growth. On the other hand, the solutions offered for developing nations to battle a receding economy include austerity via strict fiscal discipline, across the board privatisation, allowing free flow of capital, limiting governance and giving the private sector a free hand. Something is surely amiss!
Globally, national airlines are protected and funded; additionally, a significant portion of development funds continue to be directed towards improving inland freight even in developed economies but domestically the view is to privatise the national airline and railways.
The argument that the only solution for easing budgetary pressures of loss making enterprises is getting rid of them is not necessarily farsighted, unless supported by a concrete analysis. Cutting a limb without searching for a cure is definitely not a recommended course of action. Corruption, standalone for instance, is an insufficient basis for any decision for corruption is eternal albeit it manifests itself differently in different circumstances. There is all likelihood that the private sector will not refrain from greasing palms for favours post-privatisation in these very industries. Private interests breed corruption, always have and will forever do so.
Admittedly, motivated by self-interest, the private sector does a better job of running businesses. However, whenever self-interest collides with national interest, social or economic, the former invariably takes precedence. This particular conflict is the reason why governments identify certain sectors as critical, essential and strategic and directly manage related businesses. Strategic interest is the reason why nations blessed with surplus oil reserves directly own national oil companies and, because of these very strategic interests, banks in developed nations were deemed “too big to fail” and nationalised, although due care was exercised in referring to the process as anything but nationalisation. What constitutes strategic is dependent upon individual outlook. Accordingly, if a country is not blessed with surplus oil reserves, that does not mean that it has no strategic sectors — au contraire a lot more sectors become critical.
In essence, last week’s message was to take informed decisions rather than leaping in with two feet. As pointed out over and over again, it would be useful to carry out an analysis of previous privatisation experiences. Even in the power sector, a review of net economic benefit and net capital flow of projects set up through foreign direct investment under the previous power policy might spring a surprise on the policy makers. However, more importantly, while it is good to be concerned about losses, would it also not be appropriate to pursue a policy of waste not, want not?
During last week’s visit to Karachi, looking at the grey structure opposite Pearl Continental Hotel inadvertently once again provoked the comment: “What a waste.” The building in question is generally referred to as the Hyatt Regency Hotel and this abominable structure has been there for as long as one can remember, at least for more than three decades. Apparently, the building was privatised a few years back and one hopes that the project, if at all it can be, will finally achieve fruition. However, imagine the opportunity cost of having this project in incubation for a horrendously long time. And this is not the only structure on freeze in Karachi.
Not to be left behind, the capital has come up with its own offering of a suspended hotel project. This particular structure is geography camouflaged, hence residents are thankfully shielded from a regular eyesore, and perhaps for this reason most might not even be aware of it. On the other hand, if projects ‘in sight’ can remain suspended for three decades, imagine what happens in the case of ‘out of sight out of mind’. To venture a guess, more than two years have already lapsed.
Suspended grey structures are common in almost all major cities of Pakistan and, in general, eventually achieve the status of iconic monuments, which is nothing to be proud of. To make an educated guess, the intention was never to build monuments and neither were these projects part of a Keynesian strategy to kickstart the economy by building ‘a road to nowhere’. The nitty gritty of why each project failed is not important but indefinite inaction thereafter is perturbing.
The economic cost of these projects, for numerous reasons, is relatively more burdensome for the economy than a host of other factors. First of all, in almost all cases, these projects were funded by national savings, which were wasted. Secondly, had banking loans been repaid on time there would have been a multiplier effect on economic growth by virtue of recycling in the banking system. Thirdly, inaction fosters a culture of default. Fourthly, imagine how many families could have benefited from direct and indirect employment if these projects had ever been completed. This list is not exhaustive; it has only been included to give the readers an idea of the extent of the waste.
Forget grey structures, there are numerous manufacturing projects that were set up but are not in operation due to one reason or the other. While the legal battles continue between the banks and the sponsors, the plant and machinery rot. As of September 30, 2013, according to the State Bank of Pakistan, based on unaudited data, non-performing loans (NPL) of all banks and DFIs stood at a monumental Rs 621 billion. From a regulatory point of view, ensuring timely provisioning against NPLs is indeed crucial for managing the health of the banking sector. However, unfortunately, once a hit is taken on the bank’s bottom line in the form of provisioning against bad loans, there is little incentive for the bank’s management to waste time in reviving these projects.
While there can be opposing views, broadly, most stakeholders will agree that the biggest hurdle in managing banking defaults is an effective legal framework for foreclosure. While legal disputes may continue for generations, what is imperative is that the project is immediately isolated and put into operation as quickly as possible. Admittedly, there are no shortcuts in this strategy as each project will have a unique set of disasters; nonetheless, national saving should not be allowed to go to waste. With all kinds of reforms under consideration, perhaps the leadership can also spend time on this pressing matter.
Another strike at the golf club. Suspended operations seem to be in fashion.
The writer is a chartered accountant based in Islamabad. He can be reached at [email protected] and on twitter @leaccountant